Start-Up and Operating Costs

Can you Afford to Start a Business?
Perhaps the most important aspect to consider when you are starting a business is whether you can afford to start one or not. You have to ask yourself whether you have enough money to start as well as have enough money to keep the business running for a time until it is able to produce its own revenue from its own activities.
"Start up costs are those costs that are once only expenditure ..."

This means before you commit yourself to anything you should sit down with your accountant and prepare detailed calculations of your financial situation.

Most people consider a home based operation simply because of the costs savings involved. Your costs for start up and trading are heavily reduced and this would be a big factor when you wish to run a business but have little money to invest in it.

You need to find out the following things:

  1. What exactly do you own and owe.
  2. What do you need for personal living costs.
  3. What surplus cash could you have available to put into a business.
  4. Who would you approach to get the balance of finance you’ll need for the business

Calculate your Financial Requirements

  1. You will need money for 5 main reasons:

    • To initially investigate your business proposal
    • To put towards the set up and start up costs of the business.
    • To pay for the business running expenses for the first 6 months.
    • To have enough for you to live on
    • To provide a surplus of funds for extra working capital in the business

  2. To fully assess your financial position and then your financial requirements you will have to understand the 6 steps explained in detail in the following sections:
    • Step 1 – Calculate your Net Worth (How much money that you actual have)
    • Step 2 – Work out your Living Costs (What you’ll need for living costs for you and your family for period of say 6 months)
    • Step 3 - Calculate your Start-Up Costs and Operational Costs ( What you need to investigate and set up the business plus Working Capital to meet the initial 6 mth running costs of the business)
    • Step 4 – Calculate your Source of Funds/Use of Funds (The Funds you’ll have available to put into a business from your own money plus money you borrow and how they will be used)
    • Step 5 - Your Borrowing Sources (Sources you’ll approach to get the balance of finance you’ll need for a business)
    • Step 6 – Work out a Return on Investment (What return you need to try and get from your business to make it all worthwhile)

Calculation of Costs and Funding
This is a summarised equation showing your workings to arrive at your net worth, your living costs, business start- up costs, operations costs and the statement of funding source and use which shows where money will be coming from and how it would be used in the business.

Calculation is:

  1. Set Your Net Worth
  2. Add Other Private Funds and Loans
  3. less (Your Living Costs)
  4. Add Loans from bank or other lenders
  5. less (Your Start-Up Costs and Operational Costs)

    = Equals – Surplus Funds for the business