In a 2004 survey, 79% of small businesses that failed cited “starting out with too little money” as a cause for their failure. Those just starting out often overestimate how much in sales they will be making in the first few years. What you really should do is budget for little to no sales for longer than you may think.
Murphy’s law has its own version when it comes to accounting: “Everything will take twice as long and cost twice as much as you expect.”
So How Much Do You Need?
The short answer is that there is no magic number that can be considered a safe amount for each type of business. The average costs estimated by different organizations vary widely. The Ewing Marion Kauffman Foundation puts it at just over $30,000 for the average new business, but their numbers shoot up for certain industries, such as construction ($82,000), retail ($98,000) and manufacturing ($175,000). Babson College puts it at around $65,000 for the average startup.
The right amount really will differ from one business to the next, even if they are similar in every other way. In figuring out what’s right for you, don’t overlook the many types of costs that could apply to your business. Jennn Fusion of Demand media generally categorizes them into six:
1. The actual costs of making your products are, of course, the most obvious in order to have something to sell in the first place. This includes raw ingredients or materials, equipment and supplies, transportation costs, and storage costs.
2. Professional fees for any services you may need, such as those provided by lawyers, accountants, etc.
3. Technology costs should also be factored in. In today’s connected world, it is important to take stock of computers and software, Internet access, cell phones, and anything else that your business may need to streamline processes, and also communicate with customers and suppliers.
4. Administrative costs include anything needed for your business’s office, such as supplies, furniture and other equipment. This also includes costs such as licenses and permits, rent, and utilities.
5. Marketing costs is one of the most crucial categories for the success of your business, aside from the actual cost of business in number 1. As we quoted Greg Head of Small Biz Trends in a previous post, “All successful businesses have a clear marketing strategy that makes everything they do more effective.” Invest the appropriate money and for this.
6. Wages – Don’t forget to pay your employees as well, including yourself. Managing payroll can be complex, and this includes providing fair wages and benefits and withholding the right taxes.
