Starting a new venture still costs real money, even though the entry price has come down dramatically in the last few decades. For example, I come from a software background, and back in the early PC days, it could easily cost half a million dollars for a team of professionals to produce a commercial product. Now, with powerful high-level tools and open source software, winning smartphone apps can be built by a good hacker for a few thousand dollars.
Unfortunately, even today, building a good product doesn’t guarantee you a business. Most entrepreneurs realize and budget for the additional costs of incorporating a business, marketing, equipment costs, and manufacturing. Yet, in my experience as a small business advisor, they consistently tend to under-estimate or overlook a wealth of other costs that every business faces:
- Taxes and insurance payments. Even in your early days, before you break even and have to pay taxes on profits, various governmental organizations will be after you for payroll taxes, sales taxes, unemployment, and a host of fees, licenses, and permits.
Then there is the need for liability insurance, workmen’s compensation, as well as life and health insurance for your key team members. These always seem to come when you are in your tightest cash-flow squeeze if you haven’t budgeted adequately ahead of time.
- Ramp-up facilities and utilities required. It’s amazing how fast your startup will outgrow your garage or home office. You find that you need to be near major customers, or employee transportation hubs, where rents are higher than you ever anticipated.
Depending on the size and location of your business, you could easily also end up paying thousands of dollars a month in internet costs and other utility expenses, including electricity, phone service, water, janitorial services, and beak-room supplies. Your frugal role model of bringing your own lunch won’t be convincing to most employees.
- Staffing and people-management costs. Every smart entrepreneur I know thinks he can do everything personally, perhaps with a few interns or family members to help. As you scale up the business, you realize how many people you really need, including full-timers, managers, and hourly workers.
Salary costs go up rapidly, as people require training, bonuses, expense reimbursals, and an office with a requisite support team and supplies. Just the process of hiring and interviewing takes critical time, recruiting fees, and expenses you never remembered.
- Subscription software and computer hardware. You find out that all your free software tools have paid professional versions that are required to manage a business that is rapidly growing, and all your employees need a copy, as well as a computer to run them on. Then you need an expensive server and network for sharing and remote access.
These days, computer hardware also extends to smartphone subscriptions, iPads, and laptops as your employees and customers expect mobile operation. Then there is the need for more substantial business accounting, database, and social media monitoring.
- Unanticipated pivots, quality write-offs, and shrinkage. Every startup I know, in this changing world, has incurred delays and strategy pivots before they zero-in on the best customer solution and business model. New manufacturers and new technology are hard to get right the first time, so you will have unusable inventory and emergency repairs.
These are just a few of the expenses that will sneak up on you as an entrepreneur. No matter how well you plan your financials, there’s no way for you to account for all the unknowns. Obviously, the more detailed your business plan, the better. It helps to also have your plan reviewed and critiqued by an experienced advisor in the same industry.
Also to prepare for unanticipated business realities, I recommend that you buffer your budget calculations and funding expectations by 25 to 50 percent. This will give you some recovery room for unpredictable expenses and general emergencies. Remember the old saying that it takes money to make money. Don’t get caught short.