IN 2001, WHEN Wade Tinney co-founded Large Animal Games, a New York online game developer, he and his partner Josh Welber had a woeful understanding of start-up costs. “We went into it pretty blindly,” says Tinney of the business the two partners launched toward the end of the dot-com boom. Faced with a number of upfront expenses but knowing little about how much it all cost, Tinney says “we lived off credit cards and a bit of savings” and wound up about $15,000 in debt.
“We just knew that we wanted to make a living by creating games, and we knew there was a demand for that type of content,” says Tinney. But that wasn’t enough, he admits. While the venture is now thriving, “if I were starting a new business today, I would certainly do things differently.”
It’s well known that small businesses rarely make it past the two-year mark and even fewer survive more than four years. The lack of staying power, according to the U.S. Small Business Administration, is due in large part to businesses running out of money before they reach sustained profitability.
That’s because starting and running a business, even for those lucky enough to be flush with cash, is often riddled with obstacles and unforeseen money drains. These not-at-all-pleasant surprises can quickly wipe out both business and personal savings, as well as cut into secondary priorities such as marketing and training employees. In short, not planning can leave you with a mountain of debt, or worse, bankrupt.
To insure against an untimely demise, figure out what you’ll need and how much it’s going to cost before you open your doors. Here’s how to assess your business’s start-up costs:
About Start-Up Costs
Start-up costs, which are essentially the expenses incurred getting a business off the ground, vary widely depending on what type of business or industry you’re in. For example, says Joseph Anthony, a small-business tax professional in Portland, Ore., a service-based business may have to hire and train a large staff while a product-based business may need to spend a substantial sum on patents and trademarks.
Start-up costs are generally broken down into two categories: “pre-opening expenses,” such as marketing, advertising and administrative costs, and “organizational expenses,” like legal and accounting fees.
What Do You Need?
To figure out what to buy and how much to pay for it, look at what others in your industry are doing, suggests Anthony. Your direct competitors might want to keep mum, so “contact someone who does the business you do but in another market,” he says. If your aspirations are high, consider checking out the balance sheet of a publicly traded company in your industry. An accountant well-versed in businesses like yours can be a good cost reference; so can trade publications and industry groups. The SBA offers counseling and assistance through a number of programs .
Once you’ve determined what products or services to buy, figure out whether you can afford it. Many entrepreneurs scrape together enough money to launch a business using a combination of personal savings, credit cards and contributions from friends or family. Try this start-up calculator to see if you’ve got enough cash to set up shop.