These figures will be worked out when drawing up your business plan. Every single expense should be taken into account. The more detailed your business plan, the greater chances you have of success, and the greater chances you’ll have of actually getting money from investors.
Venture capitalists want to know exactly how much money they need to give you. Accurately estimating your expenses will give you an idea of how much seeds money you’re going to need. It also helps you work out what type of cash flow your business has to aim for, and how fast you need to reach this estimate.
The majority of start-ups don’t know these figures.
Unfortunately, most start-up founders have no idea what these figures are. Most of the time they are not experienced business people and have no idea what costs will be incurred when running the business. All the founders know is that they have a great idea and want to get going, without having to worry about expenses.
But this is where experienced business managers can come in useful. They have more experience and can help to organize things behind the scenes. That being said, during the early days of your start-up, you’re not going to have access to these types of people.
In the beginning you’re just going to have to guess.
At this stage, you need to guess your expenses. Just note that you need to be as accurate as possible when making these guesses. If you make wrong estimates you’ll quickly run out of any capital which you may have, and your start-up will quickly go under.
For example, as funny as it sounds A lot of start-up founders want to know if rent is a start-up cost. The answer to this question is YES. Believe it or not, rent is actually a start-up cost.
Remember, every single thing that your business spends money on is classified as a cost. This includes everything from renting office space to paying salaries.
There are two types of costs incurred when running your business.
When launching your start-up there are two types of costs which you need to work out. These are the costs you will incur before launching your start-up and while running the start-up.
For example, buying equipment such as computers, or spending money on marketing or legal services or stock are all examples of costs you’ll incur before launching your start-up. Reoccurring expenses such as paying rent and salaries are examples of money you’ll spend after launching the start-up.
As time goes by you should always be trying to reduce your expenses and increase cash flow as much as possible. The ultimate goal is to reach break-even point as soon as possible.
This is extremely important when attempting to secure money from venture capitalists. In order to move forward and quality for further rounds of funding, you will need to show them that you have reached tangible goals such as these.
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