Starting any business has a price, so you need to determine how you’re going to cover those costs. Do you have the means to fund your startup, or will you need to borrow money? If you’re planning to leave your current job to focus on your business, do you have money put away to support yourself until you make a profit? It’s best to find out how much your startup costs will be.
Many startups fail because they run out of money before turning a profit. It’s never a bad idea to overestimate the amount of startup capital you need, as it can be a while before the business begins to bring in sustainable revenue.
Perform a break-even analysis.
One way you can determine how much money you need is to perform a break-even analysis. This is an essential element of financial planning that helps business owners determine when their company, product or service will be profitable.
The formula is simple.
- Fixed Costs / (Average Price – Variable Costs) = Break-Even Point
Every entrepreneur should use this formula as a tool because it informs you about the minimum performance your business must achieve to avoid losing money. Furthermore, it helps you understand exactly where your profits come from, so you can set production goals accordingly.
Here are the three most common reasons to conduct a break-even analysis:
- Determine profitability. This is generally every business owner’s highest interest. Ask yourself: How much revenue do I need to generate to cover all my expenses? Which products or services turn a profit and which ones are sold at a loss?
- Price a product or service. When most people think about pricing, they consider how much their product costs to create and how competitors are pricing their products. Ask yourself: What are the fixed rates, what are the variable costs, and what is the total cost? What is the cost of any physical goods and what is the cost of labor?
- Analyze the data. What volumes of goods or services do you have to sell to be profitable? Ask yourself: How can I reduce my overall fixed costs? How can I reduce the variable costs per unit? How can I improve sales?
Watch your expenses
Don’t overspend when starting a business. Understand the types of purchases that make sense for your business and avoid overspending on fancy new equipment that won’t help you reach your business goals. A lot of startups tend to spend money on unnecessary things, Spend as little as possible when you start and only on the things that are essential for the business to grow and be a success. Luxuries can come when you’re established.
If you need financial assistance, a commercial loan through a bank is a good starting point, although these are often difficult to secure. If you are unable to take out a bank loan, you can apply for a small business loan.
Startups requiring significant funding upfront may want to bring on an investor. Investors can provide several million dollars or more to a fledgling company, with the expectation that the backers will have a hands-on role in running your business.
Alternatively, you could launch an equity crowdfunding campaign to raise smaller amounts of money from multiple backers. Crowdfunding has helped numerous companies in recent years, and there are dozens of reliable crowdfunding platforms designed for different types of businesses.
Choose the right business bank.
When choosing the right business bank, size matters. They’re unlike big banks that look at your credit score and will be more selective to loan money to small businesses. Not only that, but small banks want to build a personal relationship with you and ultimately help you if you run into problems and miss a payment. Another good thing about smaller banks is that decisions are made at the branch level, which can be much quicker than big banks where decisions are made at a higher level.
When choosing a bank for your business, you should ask yourself these questions:
- What is important to me?
- Do I want to build a close relationship with a bank that’s willing to help me in any ay possible?
- Do I want to be just another bank account like big banks will view me as?
Ultimately, choosing the right bank for your business comes down to the needs of your business. Writing down your banking needs can help narrow your focus to what you should be looking for. Schedule meetings with various banks and ask questions about how they work with small businesses to find the best bank for your business.