start up costsStart-up costs must first be estimated if you decide to start your own business. You may have a sound business idea and a lot of enthusiasm, but you have to be realistic with your costs.  When you estimate your start-up costs, you will be able to figure out your financial capacity.  This can make or break your start-up in both the short-run and the long-run.  Follow these essential tips on how to estimate your start-up costs.

The first step to estimate your start-up costs: correctly calculate

This is actually a very important and easy step that a lot of new businesses do not enjoy doing.  Barbara Bird, a university business management educator, boils it down to lack of optimism on the part of new businesses.  By virtue of being a new business, start-ups think that they have to under-price when they enter the market.  However, that is not true at all and thinking so can end up costing you.  Therefore, spend time to correctly calculate prices.

Time is of the essence when you start a business

The phrase ‘time is money’ may sound like a cliche but it is so true. If you spend too much time planning and do not get started with the implementation, you can lose so much money.  If you have fixed costs such as salaries, office space and communications bills, not being able to turn a profit leaves you with a lot of sunk costs.  You will not be able to keep up with this for long, so get things going.

The choose-your-own-adventure book: imagine different scenarios to your plan when you estimate your start-up costs

It is suggested that you start with a business plan and stick to it in order to have success.  While business plans are important, Jeff Shuman suggests something different.  As the director of entrepreneurial studies at Bentley College, Shuman knows from experience that   plans have to be flexible.  Although you should have a plan to guide you, rigid plans which offer no room for change are unwise, especially if your assumptions are wrong.  Therefore, you should always be willing to tweak your initial model and review your assumptions.  Once you discover new things and stumble upon new opportunities, you will want to incorporate this into the plan.  Just don’t forget to write everything down so you don’t forget.

Don’t be afraid to pull back

It is natural to want to plan big – after all, we are constantly told that the sky is the limit.  However, when it comes to estimating your start-up costs, you should do the opposite.  Instead, start with a smaller model when you are beginning a business.  Once you know your model is successful, expand bit by by.  The example Shuman gives is opting to rent a stand rather than a big store for a retail business.  This will allow you to test the demand for your products while cutting back on your start-up costs.  Though you may not generate big profit straight off the bat, you will avoid big losses while obtaining valuable information.  This information can then be used to make your business more success in the second cycle.

Be realistic

Perhaps the most important piece of advice on how to estimate your start-up costs is that you have to be realistic about money.  A number of entrepreneurs will self-finance by taking out another mortgage on their homes or drawing from their own personal credit lines.  However, this is not realistic nor wise, especially for larger ventures.  Tom Emerson of the entrepreneurship center at Carnegie Mellon University suggests incorporating the cost of capital when you are determining cash flow and initial expenses.  Seeing as capital costs usually come with interest, you will need to keep an eye out on this when you estimate your start-up costs.  The last thing you want is a bad credit rating or a foreclosure because you were not realistic about the actual cost of financing.

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