|
Start Up Costs
by Sue Miley
I just hung up the phone with an old boss of mine. She owned the business I managed. She is in the planning stages of a new start-up concept. After about thirty minutes discussing her ideas we hit upon the topic of start-up costs. It reminded me how extremely important start-up costs are to the success of any small business.
The concept is this……..if you spend too much up front on a new project, new business, or piece of equipment, even if you have a positive cash flow you may not be able to ever break even or worse, be able to cover the debt service if you had to finance it.
How do you avoid this trap? I have two key pieces of advice.
#1 - Make sure you do a break-even financial analysis on the project. Before you make the purchase decision you must look at the numbers. Most of the time this can be a simple back of the envelope analysis. How much profit do you need to make monthly to service the debt and pay it off within your desired time frame? Does it look reasonable or will you have to sell 10,000 customers per month a widget to even break-even? Obviously a brand new business will require more analysis, but you would be surprised at how many people go into business and only calculate if they can cover their expenses the first couple of months.
#2 - Only buy what you need to start the business, project, etc. If a leased 1200 sq ft building will last you for a couple of years don’t go and build your own 10,000 sq ft building. If a Volkswagen bug will get the job done, don’t invest in a Cadillac. It is better to invest in what you need so that you are quickly creating a positive cash flow. Then you can pay cash for future upgrades. Also, consider what the customer expects. If no one ever steps foot into your office, it would not be wise to invest in a Park Avenue style office. After you have made a bunch of money, go out and buy yourself that leather chair.
I believe we all need to invest in our business and quality is always important. I am just cautioning us to make sure we will get the value out of what we invest in. It can make or break your business. When I was in the coffee house business I learned quickly that when I reduced the build-out cost by 30% I was profitable and paid back our investment with more than 30% less in sales. So if we still achieved the same sales, it all went straight to profit. A major win!
Review:
1. Do a breakeven analysis.
2. Invest in what you need to get the job done. (Value)
Sue J. Miley is a Life Coach and a Licensed Professional Counselor with twenty years of experience with starting businesses and divisions with an entrepreneurial approach. . If you enjoyed this article and are interested in more articles by this author and other free resources please visit our website www.crossroadcoach.com.
Counseling & Coaching Available: Call Sue J. Miley @ 225-252-2202.
|
