How to work out what a business costs to start

The money you need is not what it costs to open. It is that plus the losses until you break even.

Most startup budgets count the obvious one-off costs and stop. The businesses that fail early usually did exactly that.

Step-by-step

1. List one-off costs — equipment, deposits, fit-out, registration, initial stock.
2. List monthly running costs from the day you open.
3. Estimate how long until revenue covers those costs.
4. Read the total funding requirement.

The gap is the real number

Between opening and breaking even, the business loses money every month. That accumulated loss is as real a requirement as the equipment, and it is the part most plans omit.

If you need six months to reach break-even and lose an average of £4,000 a month getting there, that is £24,000 on top of your setup costs. Without it you close in month four with a functioning business and no cash.

Costs that are missed

• Deposits on premises and utilities, often several months' worth.
• Insurance, frequently payable annually up front.
• Professional fees — accountant, solicitor, licences.
• Your own living costs, if you are not drawing a salary yet.
• Working capital — stock bought before it is sold, and invoices unpaid for sixty days.

Be pessimistic about the timeline

Revenue almost always arrives more slowly than planned and costs almost always arrive faster. Take your honest estimate of time to break-even and add half again. If the plan only works on the optimistic figure, it is not a plan.

Frequently asked questions

How much contingency should I add?

Add roughly half again to your time-to-break-even estimate and test the plan at half your forecast revenue. If it only works on optimistic assumptions, it is not yet a plan.

What do people forget most often?

The accumulated losses before break-even, deposits payable up front, and their own living costs during the period when the business cannot pay them.

Should I include my own salary?

Include what you need to live on. A plan that works only if you earn nothing indefinitely is not sustainable, and pretending otherwise hides the real requirement.