As a new business owner, do you fully understand what your business costs are? Do you know the difference between your startup costs and your reoccurring expenses? And do you know when you'll break even on your startup costs? Not sure? This blog post is just for you!
The first thing you want to keep in mind when it comes to your business finances is that your business finances should be kept separate from your personal finances. While you can use your personal money to initially fund your business, you need to ensure that you have separate banks accounts for your personal life and for your business so you can track things accurately and so you avoid any issues come tax time.
Your business expenses can be broken out as follows:
- Your start-up costs:
These are the costs related to you setting up shop. This may include the following:
- Your online presence (Domain name registration, website, and hosting etc)
- Business registration
- Legal fees
- Brand design and development
- Initial advertising
- Location and material costs (location deposits, first month's rent, office space, furniture, fixtures, equipment etc)
- Any one-time fees
- Your operating expenses:
Also known as your reoccurring costs. These are the costs or expenses that will keep your business running on a day to day basis. Some examples are:
- Product replenishment
- Monthly rent
- Phone bills
- Shipping costs
Once you know what your costs are, you need to determine how you will pay for these expenses and keep your business running until you can generate a profit.
Some questions to ask yourself are as follows:
- How much of your personal money will you be putting into starting your business?
- What are the sources? (Credit cards are NOT recommended)
- Will it cover your initial startup costs?
- How many months of operating expenses will it cover?
- Do you need to consider a loan from family, friends, investors or the bank?
Keep in mind that if you intend to get a bank loan, in order to get approved you'll need to have a solid business plan in place.
Calculating Your Business Breakeven
You will also need to factor in some projections that will help you determine the following:
- How long it will take you to recover your startup costs while covering your operating costs
- How soon you will be able to turn a profit
You are going to have to do some math to calculate your business breakeven based on your unique circumstance. In other words, how much money do you need to bring in every month, to pay your monthly expenses plus recover your initial startup costs over time (including any loans you might have taken) after which time any earnings you make after expenses may be counted towards your business profits?
Here is a very simple example to break things down:
If your startup costs are $400 and,
Your monthly expenses are $200 and,
You have the potential to earn $400 a month in your business,
THEN you will need 2 months to recover your startup costs, while still paying your monthly expenses BEFORE you will start earning a profit (assuming your monthly expenses remain the same).
If you are a newbie business owner, you want to have a firm handle on your business expenses, the goal is to keep your expenses low, recoup your initial startup costs and become profitable as quickly as possible.
- How to create a simple business budget
- How to be successful managing your business finances
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- How to pay yourself a salary as a small business owner
- 10 Tools to help you save money as a business owner