How Much Does It Cost To Start An Electrical Business – What will it cost to start your business? It’s hard to know for sure, but it’s important that you start planning early to avoid any unexpected expenses.
Starting a successful business requires preparation. And while you may not know exactly what those expenses will be, you should start by researching and estimating what it will cost to start your business.
How Much Does It Cost To Start An Electrical Business
Startup costs are expenses incurred before running a business. These are the bills and expenses you will need to cover until the launch of your business. While every business will need to account for specific startup costs, your business generally falls under a brick-and-mortar, online or service-based organization.
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Like your business plan, estimating your startup costs is part of creating a roadmap for your business. Even having a rough estimate can help you avoid unnecessary risks and stay on track during the more volatile months.
Still not convinced you should figure out your startup costs? Here are some more reasons why you should calculate your startup expenses.
Different industries and businesses require different expenses, which means there is no simple formula for calculating startup costs. But that doesn’t mean you can’t make an educated guess that accurately reflects your business needs.
A SaaS business, for example, may need to account for additional online tools or server expenses to keep your site up and running. But an apparel store, brick-and-mortar, or online, has to account for physical inventory and shipping expenses.
How Much Does It Cost To Start A Business? (research) (2023)
Many people underestimate startup costs and start their business in a haphazard, unplanned manner. This may work in the short term but is usually more difficult to maintain. Startup costs are nearly impossible to manage unless you calculate them correctly and customers are often wary of brand new businesses with temporary logistics.
Your financial plan is an overview of your current business finances and projections for growth. Realistic startup costs, even if they are only estimates, are one of the key elements of building a viable financial plan. Understanding what it will take to start your business can help you:
To successfully leverage your financial plan, you’ll need to continually review it throughout the life of your business. Having these initial startup estimates will give you a baseline that you can refer to during these reviews. After a few months of operation, you’ll know whether your estimates are realistic or whether you need to make any adjustments.
Investors and lenders want to understand the roadmap you have for your business. You’ll need to be prepared to answer questions about your business model, sources of revenue, growth projections and initial startup costs. They need to see that your business is viable and that you’ve thoroughly explored what it will take to start, operate, and grow.
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In this case setting realistic startup costs is a necessity. And being able to show how you believe expenses will change or stay the same over time will give them a better idea of how you intend to manage your business.
Just like when developing your business plan, or forecasting your initial sales, it’s a mix of market research, testing, and informed guesswork. It is up to you to adjust accordingly based on actual results over time.
If you need a starting point, look at your competitors and industry benchmarks for specific expense categories. You don’t want to directly copy the expenses you discovered, but confirm whether your estimates make sense based on current market factors. You may find that you have a competitive cost advantage based on a healthy vendor relationship or a common expense that you are able to avoid based on your business model.
Now this may make you wonder, how exactly can I estimate realistic startup costs for my business? Start by making these three simple lists.
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These are the expenses or upfront costs that occur before you launch and start bringing in any revenue. These should be divided into one-time and ongoing expenses. By breaking them apart in this way, you can give yourself a more accurate estimate of what it will take to launch your business. Here are some common expenses to consider in both categories:
These make up just a handful of the potential costs you’ll need to consider. Some will remain fixed, others will serve as variable costs and some may shift between the two over time. By outlining them this way from the start, you’ll be able to better keep track of your expenses and identify any natural cost-cutting options over time.
These are costs associated with long-term assets purchased to start your business. While cash in the bank is the most basic startup asset (and we’ll talk about that later) there are a few other common assets you may need to invest in:
Now there’s a reason why you should separate costs into assets and expenses. Expenses are deductible against income, so they reduce taxable income. On the other hand, property is not deductible against income.
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By separating the two at the outset, you can potentially save yourself money on taxes. Additionally, by recording expenses accurately, you can avoid overstating your assets on the balance sheet. While having more assets is generally a better look, having assets that are worthless or frivolous only inflates your books and potentially makes them inaccurate.
Listing these separately when starting a business is good practice and leads into the final part to consider when determining startup costs.
Cash requirements are an estimate of how much money your startup company needs in its checking account to get started. In general, your cash balance on the opening date is the money you raised in investments or loans minus the cash you spent on assets and property.
This is the last piece of the puzzle you’ll need to get started. As you make your plan, refer to your cash flow projections. If your cash balance drops below zero, you need to increase your financing or reduce expenses.
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Many entrepreneurs decide that they want to raise more cash than they need so that they have money left over for contingencies. It makes sense when you can do that, but it’s hard to explain to investors. Outside investors don’t want to give you more money than they need, because it’s their money.
You can find experts who recommend covering six months to a year of expenses with your starting cash. It’s cool in concept and would be great for peace of mind, but it’s hardly practical. And this interferes with your estimates and reduces their value.
To get a better idea of what you’ll really need in your starting cash balance, calculate the deficit expenses you’re likely to incur during the early months of business. From there, estimate how much cash you’ll need until you reach a stable break-even point several months and even years after opening.
Now that you have your potential assets, expenses and starting cash, it’s time to put them all together to estimate your full startup costs. There are two possible methods you can use to develop these estimates.
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The more traditional, what I call the worksheet method, involves creating separate worksheets for beginning costs and beginning financing.
Much of the innovation we use in our LivePlan software makes it simple to manage cash flow as a continuous process with rolling projections of expenses, asset purchases and financing. Each option is valid, so let’s see how to execute each method.
The traditional method uses a startup worksheet, as shown in the figure below, to plan your initial financing. The example here is for a retail bicycle shop. It includes a list of startup expenses in the upper left, startup assets in the lower left, and startup funding on the right.
The total startup cost in this example is $124,650, the sum of expenses ($3,150), and assets ($121,500) needed before lunch. The funding plan, on the right, shows that the owner plans to invest $25,000 of his own money and $99,650 in debt. The debt includes a $70,000 long-term loan and a $17,650 business loan, a $2,000 note, and $10,000 of other current debt (probably credit card debt).
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Pay attention to balance here. One side shows startup costs and the other shows where the money will come from.
Also note that the assets include $35,000 in cash and a bank account. This estimate, in this case, comes from the example shown above, which calculates the need for $25,708 in starting cash. The entrepreneur estimates that it would be $35,000 to keep the buffer instead.
Remember, the worksheet is covering what happens before launch. This does not include post-launch ongoing sales, costs, expenses, assets and financing.
This worksheet example shows an estimated $3,150 in pre-startup expenses. This is your initial loss when starting out, meaning these expenses can be deducted from income later for tax purposes. This loss may sound bad on the surface, but it’s perfectly normal for new businesses. In fact, it’s financially beneficial, as deductions from future taxes reduce your tax bill.
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LivePlan suggests a different and perhaps more
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