How Much is Too Much to Spend When Starting a Business?

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  • #5146
    Avatar of SusanSusan

    All businesses are not created equally – and that goes for the amount of funding that may be needed to get your new company off the ground. For example, in some cases, it will be necessary to purchase inventory and / or equipment, as well as to rent (or buy) office space to house your company and its belongings. But, even if you are able to qualify for a nice amount of funding, how much should be considered “too much” to spend up front?

    The answer to that is it depends.

    For example, in some cases, an initial amount of product inventory will be necessary. Likewise, if you offer certain services to customers – such as landscaping – then it will be necessary for you to have at least some type of equipment. (In the landscaping example, it can be difficult to cut grass without a lawnmower!) In other instances, though, when offering an online consulting service for instance, your overhead and other expenses could be quite a bit lower. This is especially the case if you start out working from home.

    What type of business have you started – and in turn, were your initial costs seemingly high, low, or just right in order to help get your company running over time?

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    • #5154
      Avatar of Matthew KingMatthew King
      • Total Post: 177
      Points: 2,320
      Business Consultant 1

      When I began my retail business, I took a 20K Credit Card in USD to begin inventory, setup shipping, a domain name, website development, amazon setup, e-bay setup, custom drop shipping, and a few bells and whistles. I also worked out of my home so I didn’t have things like rent or internet to pay for more than I already was. However, looking back now, I tried to make a high investment and I ended up mis-managing some aspects of the business or diving in too hard.

      Part of this reason was also why the business failed still in its early years. However, once I took care of the debt that was hanging over my head from those mistakes. I launched another business on a mere $500 investment, still worked out of home and got customers a different way then what I was doing before. I would say that the second one I started was just in the right order. However, it took a failure to get to that point.

    • #5156
      Avatar of SusanSusan
      • Total Post: 36
      Points: 126
      Newbie 2

      Sometime failure is the best type of learning experience. Back in the mid-2000s, during the real estate boom (and right before the real estate market crash) I was highly leveraged in buying property. Unfortunately, I did not project what could happen in some (or all) of my properties did not sell or get rented. This ended up costing me a great deal of money, and I tried to stay afloat using my savings, and even by taking cash advances on my credit cards. While this was a very expensive lesson, I am much more careful now going into any type of business – especially if it requires a lot of money up front.

    • #5234
      Avatar of Matthew KingMatthew King
      • Total Post: 177
      Points: 2,320
      Business Consultant 3

      Indeed, while others should be careful learning from mistakes by fellow business owners. Failures often lead to successes later on. Does anyone else have some hard learned lessons that made their business better off?

    • #5247
      Avatar of SusanSusan
      • Total Post: 36
      Points: 126
      Newbie 4

      In some cases, new  business owners can have “shiny object” syndrome, meaning that they will run from one (oftentimes expensive) course or training program to another that will seemingly bring them closer to knowing everything they need to know about starting a business. But, while it is important to have a good understanding of what you are doing, if you spend too much time jumping from one course to another, without actually producing any results, it will cause you to procrastinate – in turn, delaying the actual start of your business. In this case, be sure to have a specific focus for your business, and to take steps each and every day that will actually bring your closer to your goals.

    • #5271
      Avatar of Matthew KingMatthew King
      • Total Post: 177
      Points: 2,320
      Business Consultant 5

      I believe may writing down some milestones that are in-between each major goal would be a good way to see progression and to also keep it under control rather than seeing one giant goal at the end that might take awhile to get to.

    • #5313
      Avatar of meshackmeshack
      • Total Post: 5
      Points: 41
      Newbie 6

      How To Estimate How Much You Need to Start Your Business
      4 min read 

      As an angel investor, I’ve listened to a lot of elevator pitches from a number of aspiring entrepreneurs. More than once, a confident presenter would say to me, “All I need is $3 million so I can really make this business work!” This seemed like an unreasonable declaration, since they only had pro-forma financial projections and no real paying customers.

      What I heard instead was, “I am not sure how much money I need, but I want to get enough from you that even if I fail, I can get paid during the next few years.” As a result, I never funded these entrepreneurs. I wanted them to be as careful with my money as they would be with theirs.

      Many entrepreneurs actually waste too much cash when starting their company. In fact, they typically overestimate the amount of money they need in the first year of business.
      The Kauffman Foundation found that the average startup uses about $30,000 in capital . Investing too much capital up front is also very risky. Most of the funding typically comes from the founder’s savings account or family and friends. Spending money from these sources can be emotionally stressful and distracting. Additionally, securing loans from banks still requires a personal guarantee, so they still need to be paid back, even if the company fails.

      The smart entrepreneur doesn’t undercapitalize their business, but carefully tracks where and when the money is invested in the company. They put only enough money in as is required to achieve the desired results. From the initial investment, they use 25% now. Then they set aside 25% to be used for later growth and another 25% to cover unexpected expenses. Finally, they keep 25% for a personal parachute out of the business if it fails.

      Putting too much capital in the company at the start is almost a guaranteed waste. I have always said that “too much money will make you stupid.” Every small business owner needs to be frugal, but not cheap. They need to make investments in growing their company, but not waste money, especially in the first three months when the entrepreneur is giddy and feels immune to failure.

      Use these metrics to determine how much money you need and where you should spend it.

      The Business Metrics
      Determine the profitability of each unit or service sold. It is key to know—on a broad basis—how much profit is in each sale, and how much customer revenue can fund the overall cash needs of the company. Businesses that get most of their gross profits through their customers grow in the safest and most ideal way.

      The Revenue Forecast
      This starts with forecasting unit sales over the next year to 18 months. Unlike most graphs, the growth will not be linear and will be slower than planned. Look at the forecast based on how much is being spent to attract customers.

      Determine the customers’ lifetime value (how long they will stay). Forecast the variable expenses (cost of goods or cost of sales) associated with each transaction. Finally, cut the forecasted revenue in half, then double your expenses, since no forecast from a startup entrepreneur is every truly conservative. This will get the numbers closer to reality.
      Click here to read our guide to forecasting and budgeting.

      The Fixed Expenses
      These are company expenses that are necessary no matter how successful—or unsuccessful—the company is at selling its product. These costs typically include rent, utilities, employees, website upkeep, phone service, etc. This is sometimes called the “monthly nut” that has to be paid to keep the company in business regardless of sales.

      The Cash Flow
      All companies operate on how much cash they actually have in the bank. Expenses can’t be paid with receivables or customer promises. Every entrepreneur needs to know how to read a cash flow statement or, at the very least, look at their bank statement once a month to see if cash flow is shrinking or growing to cover ongoing expenses.

      • This reply was modified 4 years ago by Matthew King. Reason: Admin Edit
    • #5356
      Avatar of DieterDieter
      • Total Post: 4
      Points: 30
      Newbie 7

      I would still assume it is the question of what type of business you want to make?

      Bank ? Getting a bank license alone is hard, but out of my knowledge you need to put a lot of cash as security fund to do so

      Retail? You need to think about investing into the warehouse, shop floor, purchasing gods and much more, I would guess 30,000 USD would limit you what you can resell. There are single technology equipment which would require on a single sell already more money to purchase

      Service? Yes, here we go, the initial investment might be low, the profit margin should be high, a way to go and depending in which country you settle your registration fees are maybe covered.

      Lastly, don’t forget that in each country the legal formation of a company costs different money and requires different money to be put on the table. Making a limited requires in most countries to put money into a bank account. Not to talk about an incorporated this has in most cases much more implications.


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