Deciding if you can afford to start a business
Assessing if you can afford to start a business takes careful thought.
The first thing you should do is analyse your own expenses:
- Go through your personal spending.
- Add up your mortgage or rent, bills, food, transport, any school fees, and discretionary spending – for example cafes, movies and event tickets.
- Look for things you can cut.
- Add up the items you can’t cut to work out the least amount of money you need to sustain your lifestyle.
Running a business can be fulfilling, but it can also be financially stressful – especially at the beginning. Being realistic and honest with yourself from the start will help you avoid financial worries.
Calculating your running costs
Once you’ve thought about the impact on your personal finances, focus on how much it will cost to get your business up and running.
One-off costs to start up
These tend to be more expensive items, including:
- lease or purchase of buildings or land
- permits, licences or other compliance costs
- equipment and machinery
- vehicles
- shop fittings and office furniture
- branding
- a website and domain name
- registering your intellectual property, such as trademarks or patents (not all types of intellectual property need to be registered).
Fixed costs
These are bills and other costs you paid on an ongoing basis, also known as overheads.
These tend to be time-related, such as monthly phone bills or quarterly rates payments.
Common fixed costs are:
- insurance
- utilities, such as electricity and internet
- rent or mortgage payments
- wages and salaries.
Variable costs
These are expenses that vary depending on how much, or how little, your business produces.
Common variable costs are:
- raw ingredients
- production materials
- stock orders.
An accountant can help you with your projected expenses and spot any others you might not have thought of.
If you’re planning to approach lenders or investors, they will likely be more comfortable supporting your business if you can demonstrate previous business experience.
If you’re new to the business, it helps to build up your skills and experience before seeking investors or applying for big loans.
Forecast your cash flow
Using your estimated costs, the next step is to do a cash flow forecast for your first 12 months of business. It’s typically a spreadsheet that projects your business income and expenses.
It’s common to operate at a loss when you first start a business. Make sure you have enough money in reserve to sustain yourself during this period.
A cash flow forecast will help predict if you:
- are financially prepared to start up
- might need to borrow money.
Doing your research
Talk to advisors
An accountant will give you good insights into how much money you’ll need to get started. Try to find an accountant or advisor who has a good track record with businesses like your own.
Research other businesses in your industry
Another good way to get an idea of profits and costs is to talk to businesses like your own. You’ll be surprised how open certain competitors might be to sharing their experiences.
Statistics NZ and Inland Revenue have a range of tools to explore financial data for your market and your competitors.
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