Starting a small business takes funding. But how much cash do you need to start a business? Knowing your initial expenses is the best way to assess how much funding it will take to get your idea going. Once you have a list of known costs, you can calculate how much cash you need to get your company off the ground.
A good rule of thumb when starting a business is to have enough cash on hand to cover expenses for at least three months. Keeping your costs in check early will keep your company in balance, allowing you to make a profit – and possibly expand somewhere down the line.
Deciding How Much Cash You Will Need To Start A Business
Most small businesses need between $30,000 and $40,000 to cover expenses for the first year. How much funding one company needs, however, might be more, or less, than another. Some products are more expensive to manufacture and market. You will need to make sure you list all relevant expenses to get an accurate picture of how much cash you will need.
Once you have your expenses listed, you can begin to calculate your startup costs. Here is a simple formula to help you answer the question “how much cash do you need to start a business?”:
Total One-Time Expense + (Total Monthly Expense x Three Months) = Total Cash Required to Start Your Business
An online startup cost calculator can also help you determine how much cash you will need to get your company up and running. The US Small Business Administration (SBA) website includes the following fillable PDF spreadsheet to help companies determine their startup costs. Plugging in your expenses will give you a better idea of how much one-time and monthly funding you will need for your business:
Startup Costs
Startup costs are sometimes called “one-time expenses.” These are non-recurring expenses you will need to pay to incorporate, market, and prepare your business for opening day.
One-time costs incurred by most businesses include the following:
- Legal and Accounting Fees
- Licenses or Certifications
- Graphic Design (website, logo, packaging, signs)
- Inventory
- Packaging
- Manufacturer set-up fees
- Printer set-up fees
Inventory, packaging, and manufacturer set-up fees are usually among the top expenses for startup brands. You might not need to worry about these costs for your particular startup. If you plan to manufacture a product, you will need to consider the cost of all three.
Beauty and wellness startups especially will want to pay close attention to their inventory. Many beauty brands use botanical or other natural ingredients with a limited shelf life. The last thing any company wants to do is toss expensive inventory that has passed its expiry date, so it is important to balance having enough product on hand with the risk of overstocking. You will want to make sure you have a reliable supplier – and the cash on hand to pay them – as you plan your business.
Monthly Costs
In addition to knowing the startup costs for your business, you should also track your monthly expenses. These are recurring or ongoing expenses that include the cost of shipping, new inventory, loan payments, utilities, and more.
Other monthly expenses may include:
- Rent
- Employee wages or salaries
- Insurance
- Marketing costs
- Inventory
- Accounting and Legal
- Travel
Knowing your monthly expenses will allow you to use the formula shared above to accurately reflect your cash needs for the first three months. You will also have a ballpark figure of how much cash you might need going forward. Just make sure you continue to track your expenses and income each month.
Fixed vs. Variable Expenses
Some monthly expenses don’t change often, if at all. These “fixed expenses” are the easiest to factor into an annual sales budget. Loan payments, credit card payments, and insurance are all considered fixed costs.
Variable expenses, as the name suggests, do change – sometimes month to month. Shipping and supply costs are two types of variable expenses that can rise quickly if left unchecked.
A good way to keep track of both fixed and variable expenses on a monthly basis is to record both income and expenses on a budget spreadsheet. You will want to make sure your spreadsheet is updated each month to account for any changes over the previous month.
Making Budget Adjustments
Using a budget spreadsheet allows you to track cash flow, which is every dollar coming in and out of your business. Tracking your cash flow on a monthly basis will show if you are meeting your financial obligations. It will also show if your company is growing.
Once your startup nears its three-month anniversary, you will need to continually assess its cash needs. Sales projections in the first year might require you to make any number of changes – from pricing to financing – to keep things running smoothly. It will be easier to ride the waves if you know which way your money is flowing.
It is always possible to maintain a spreadsheet via relatively cost-free options like Excel or Google Sheets. Another option is to automate the budget process through accounting software designed to minimize errors and save time. QuickBooks and Netsuite are a couple of bookkeeping apps to consider, although they can be costly for some startups. Luckily, there are free accounting software options, too.
One accounting app available at no cost to small businesses is Wave. This specific app is free to use for both expense tracking and invoicing, with a free banking option as well. Companies who need to meet payroll can also pay their staff through the app for a monthly fee.
So, How Much Cash Do You Need To Start A Business?
Starting a new company can seem complicated. But answering the question “how much cash do you need to start a business” is actually simpler than you think.
The simple answer is to have enough cash on hand to cover your one-time costs and all business expenses for three months. Listing your initial costs – then tracking expenses monthly – will help your company stay grounded. Simple formulas like the one in this post, as well as online startup calculators, will take care of much of the financial guesswork for you.
After you launch your first product(s), you might choose to expand by selling your products wholesale. Supporting your startup with the right amount of investment from the beginning will increase your chance at success later.
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