by W.W. Mayes
Last week I shared with you the need to have mentors. The value of having individuals who can listen to you and honestly critique you and critique your business cannot be measured. Even the best and most successful business persons I know, have people to critique them honestly. Remember there is no one you can lie to easier than yourself. I have been hired many times by businesses to review them, only to have to conclude that if they had been willing to have an honest review a year or so earlier, the business could have been saved, but now it was too late.
The first thing most individuals start with when building a business plan is the “Mission Statement.” This is much more important than people think but I want to go right to the heart of things in this article: Money! For most of us, this is the reason we go into business. Before you move forward with opening the doors for your business you should have a handle on the business’s money plan. Cash flow is the life blood of any business. If you are like many people who ask me to assist them, you are looking to start a business because the economy has cost you your job. You will need to know how much money you will need to start your new business, how much you will need monthly in order to pay your bills until your business becomes profitable, and how long it will take for you to become profitable.
Let’s say that you need $3000 every month to cover your personal expenses. Then we will say that the monthly overhead to start your business is another $1500 and month. Finally we will project that you need $15,000 for startup cost. Now if you were buying into a franchise, these numbers would be greatly increased. I have assisted friends with startups that are a franchise and they had to come up with $250,000 to $1,000,000 just to get started. YOU MUST BE HONEST WITH THESE NUMBERS. For your personal expenses, figure housing, transportation, food, utilities, insurance, clothing, and any other regular expenses. If you have school-age children, figure into this money, school activities and recreational activities. I have seen individuals cancel their insurance in order to lower their monthly bills. I do not agree with this at all! I understand that health insurance is expensive but medical bills are much more expensive. Also, it’s against the law to drive a vehicle without auto insurance. You need to be responsible.
When figuring out what your monthly overhead for the business will be, include rental space, such as an office or warehouse, phone lines, internet connection, web page placement, insurance, mail and/or shipping, transportation, and any employee costs. Remember that what you pay an employee is only a portion of what it costs to have an employee. In addition to the employee pay, you will have the employer portion of their payroll taxes, unemployment insurance, workman’s compensation, and other insurances. You should put together a spread sheet. Excel is a great product for doing this with. There are many software programs on the market that will walk you through this process. YOU MUST BE HONEST. Even the simplest businesses have expenses. I have asked many business owners what their monthly operating cost is and have tried to give me a number off the top of their heads. This will not work unless you are looking to go out of business.
When figuring out your start-up cost, the first thing I recommend that you do is to contact your local city, county, and state offices, to find out what licenses and permits are required to open a business. This is even true with businesses that are run out of your home. I have had long conversations with individuals who thought they could start a business out of their home without speaking to their local governing body and they ended up getting a letter in the mail with a sizeable fine. You will find that your local government wants to assist you and that it is much easier to do things correctly from the beginning. I can tell you that each city has different rules. I have had associates open business across the street from where they had planned because across the street was a different city and the cost for permits to run their business was thousands less by simply locating themselves 100 yards north. Do your homework up front and it can save you headaches and money.
Will you need equipment? How many computers will you need? Office equipment and supplies are always important. Now one of the ways to greatly save on start-up costs is to purchase used equipment and furniture for your business. About fifteen years ago I was asked to assist two different people with opening new restaurants. I advised both individuals to attend auctions for restaurants that had gone out of business. One of the owners listened to me and they spent around $11,000 to acquire everything they needed for setting up their restaurant. The commercial stoves, refrigerators, the tables, chairs, computerized register, and even the place settings were bought at auctions. The other owner refused to do this and instead purchased over $120,000 of equipment and furnishings on a lease with their home as the security.
The restaurant that purchased everything from auctions had a monthly debt load of $0 for the items they needed to start business. The restaurant that purchased everything brand new had a monthly lease payment that was over $5,000. Both opened their doors within a month of the other. The food was wonderful at both restaurants. The customers of the restaurant that had purchased everything they could from auctions, had no idea where the equipment and furnishings had come from any more than the customers for the restaurant that had all brand new stuff. Even though both restaurants had about equal the number of customers, the restaurant that had purchased everything brand new and on a lease, went out of business within a year. They had too much debt load to cover each month. The other restaurant is still open today in Castle Rock, Colorado and doing very well 15 years later.
Yes, we all like brand new stuff but I have learned from my own mistakes over the years and learned that new-used is just as good as brand new. There are auctions every week in Southern Nevada and Southern California. Do your research and take your time before you open your doors and it can make the difference between prospering and going out of business. We will be covering in greater detail the process for determining start-up costs and keeping your business afloat while you are striving for profitability in the weeks to come. I wanted to give you some food for thought in this article. Next week I will step back and discuss the formulating of your business plan. The week after that, we will cover marketing, promotions, and sales; and after this we will get back to the real work writing a short term and long term budget.
If you have any business questions please feel free to send those questions to [email protected].