Small business owners are often new entrepreneurs. When you are just starting out, it can be tricky to know how much money you need to start your business and keep it running. Below are a few things to take into consideration when it comes to knowing how much money you will need to start your small business.
Is the Business Online, In-person, or Both?
Having a physical storefront will lead to more business expenses than having an online-only store, simply because you will need to pay to rent/lease the space. However, this doesn’t mean that you should cross out the idea of having a storefront. It can pay off to have a physical storefront. People passing by may enter your store, which isn’t something that can really happen online. Plus, there are still many people who prefer to shop in person.
If you choose to have an online-only shop, there will still be some fees to take care of that a business loan can help to cover. These fees include buying/maintaining a domain, website-creation fees, and possibly hiring a web designer or social media manager.
How Much Inventory Do I Need?
Whether you are providing a service or selling goods, having an in-person or online business, you are going to need to keep inventory on hand. How much inventory you need depends on a few things.
- Does the item expire?
- How fast do you use the supplies?
- Which items sell best?
- Do you use the same supplies for many products?
- How often do you buy more inventory?
Selling/using perishable goods in your shop will require you to either find new ways of preserving the supplies (freezing, drying, etc.) or order the supplies on a scheduled basis. Use this schedule to figure out how much this will cost you.
You will use some supplies more often than others. This means you will not likely be able to schedule to reorder new supplies all at once. Instead, it makes more sense to order bulk supplies as needed. Try to schedule these together when you can to save on shipping costs, but do not expect all orders to line up nicely.
Do I Have Another Source of Income?
Most businesses take months or even years to turn a profit. This is because start-up costs for businesses are high and will take a while to recoup. This is true whether or not you plan on taking out a business loan or not.
With this in mind, you will either need another source of income, a partner (business or married) that can earn other income, or you will need to take out enough in business loans to cover your other expenses while you are waiting to earn money from your business.
How much money you will need to keep going while expecting a loss from your business will depend on your lifestyle. The more expensive your daily life is, the more money you will need to take out loans or have saved up ahead of time.
Will I Hire Employees?
Having employees can help to make your business more productive, but that does come with an added expense. If you are hiring full-time employees, you will need to factor in paying for health and other benefits most of the time. There will be fewer expenses included with hiring a part-time employee. Whether you need a full-time or part-time employee will depend mostly on how much work you need to get done. Make sure to check your local to learn everything that goes into hiring employees.
You may also need to hire contracted employees, like accountants. These contracted employees should be used on an as-needed basis. Hiring contractors will come with different labor laws and tax rules than full or part-time employees.
Analyzing Your Potential Profits and Losses
Analyzing your potential profits and losses is an essential part of determining your business loan needs. Before applying for a loan, you must understand the potential profits and losses associated with taking it on. To do this, you should identify your current market position and analyze the changes that could result from taking out a loan.
When considering profits, evaluate how much they might increase as a result of using the loan. Consider factors such as capital investments made possible by additional financing; increased production capacity; improved quality of products or services; discounted prices due to increases in quantity purchased, etc. On the other hand, when assessing losses, consider putative impacts such as interest payments on the loan; higher risks related to investment activities; decreased liquidity due to a larger debt load; etc.
In addition, you should compare different types of loans and calculate their expected costs. Different terms may make one option more attractive than another. Consider not only the rates of interest but also fees associated with obtaining each type of loan to ensure that you receive maximum benefit from the funding source you choose. Finally, use what-if models to predict based on projected economic conditions how each financial instrument would affect your budget over its life cycle.
Your analysis should provide a comprehensive understanding of how much money you need and how it can help your business succeed or fail in an ever-changing marketplace. With this information as a foundation for decision-making, you can then determine which type of loan is best suited to meet your goals in terms of cost and overall profitability potential.
Make sure to ask yourself all of these questions before you do the math to see how much money you need to start up your business and keep it running. If you are having trouble with math, contact an accountant or another business professional who has more experience than you. Once you know all of these numbers, you can better estimate how much money you will need to take out in loans. When in doubt, apply for a little more in loans than you think you will need. It’s better to be safe than sorry in business!