The SBA reports that 1 in 3 new businesses fail in its first two years of operation, and they cite the two main reasons for the failure as a lack of overall planning, and underestimating how much startup capital is needed to sustain the business until it can turn a profit.
Just how much capital should I raise, you ask?
The Service Corps of Retired Executives (SCORE) suggests you raise enough money to cover your first six months of operation, at a minimum. If you know for certain it will take longer than that to turn a profit then you'll need to account for those extra months as well. (That's where the planning comes in!)
Remember, there are fixed and variable costs to all operating businesses. Your fixed costs are those costs that do not change from month to month, like rent, insurance, internet, or fixed rate mortgage payments. Your variable costs are those that can change on a regular basis as your usage changes. Things like supplies, paper, telephone and cell phone bills, utilities, advertising, and even repairs can be variable costs.
Your monthly fixed costs plus variable costs let you know the minimum amount you need to survive on a monthly basis. It's always a good idea to be conservative with these numbers and add some padding as a contingency for those tight months.
You can also estimate your break even point with a simple based template. It analyzes your fixed and variable costs and estimated revenues and lets you know how long it will take you to break even.
If this is your first business and you have no idea where to find numbers for your industry you might have to do a little more research to arrive at realistic numbers. You can check business costs surveys online, or you can do it the old fashioned way, by hitting the pavement and talking with those who've blazed the trail before you. Find those entrepreneurs who have started the same, or similar, businesses and ask their advice. Most owners will be willing to share with you their tips and tricks. For the ones who don't, wish them well and move on to another. It shouldn't take long to find an owner who's proud of their success and willing to share a story or two.
You can also try trade associations and trade shows. Every industry has an association connected with it and they are a wealth of information. Find one associated with your area and contact them. Many of these associations have start-up kits, and you should ask for one. Libraries are great sources for local business information. They are often the places where local civic groups and chambers of commerce meet.
You want to beat the odds and be part of the percentage of businesses that make it past that two year mark. Take care in planning the financial health of your business and make sure you capitalize your start-up properly.
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