Have a Solid Plan? Then Change It

Jeff Shuman, who directsentrepreneurial studies at Bentley College, says, "Theconventional wisdom is that an entrepreneur sees an opportunity, comes up witha business plan to capitalize on it, determines the capital that needs to beraised, raises the capital and then applies it to building the businessdescribed in the business plan."

There's one major problem with thatmodel, says Shuman. It all hinges on getting the business right the first time,and that doesn't often happen. "In reality, it's likely that some of yourinitial assumptions are pretty good and others aren't going to be worth thepaper they're written on," he says.

Shuman and others say that figuringout your small business start-up costs means regularly reviewing yourassumptions and changing your initial model. Writing a plan is good because itforces you to write down everything you are going to need to start yourbusiness.

But that initial plan is likely tochange repeatedly as you learn new things and incorporate them into the plan.

Be Willing toPull Back

It's tempting to add up everythingyou need for the full-fledged business you imagine, and decide it's what youneed to start out.

But pulling back and looking for asmaller model can give you a way to get started while also saving money. Shumanuses the example of someone who calculates the total cost of starting a retailbusiness in a local shopping centre.

"You could start that way andwrite a business plan based on that amount," he says. "But maybeyou'd be better off renting a stand and testing what the demand is for yourproducts at that location."

This consumer testing reduces yourinitial small & medium business start-up costs. The result is that theinitial cycle of your business is dedicated not so much to generating profitsas to generating information. "With this, you can fund your business on acycle-by-cycle basis," Shuman says. "When you go for the second cycleand for expanding your business, the numbers are now based not on focus groupsor surveys but on real-world experience."

Calculate Pricesand Time Correctly

Calculating your initial cash flowis part of figuring out your start-up costs. It's an area where businesses aresometimes less optimistic than they should be. "Small business owners mayunder-price their product or service, thinking they have to come in at thelowest price point to compete," says Barbara Bird, who chairs the businessmanagement program at an American university. "They don't necessarily needto do that."

CorrectlyEstimate Your Start-up Time

Yes, when beginning a business,time can be money. Let's say you're going to have fixed costs such as a monthlylease. If you have to make improvements to a space before you can actually openfor business, those fixed costs are going to be additional start-up costs untilyou can actually open for business. I've watched many entrepreneurs draw up atimeline for their ventures and get tripped up on the safety and inspectionrequirements imposed by local agencies.

For that reason, I think one of thefirst places a prospective new business owner should go is to the localgovernment planning or license department. Construction permits and inspectionscan push a prospective opening date back by months. If you fail to take intoaccount the cost of this time, you could be short of working capital right atthe start. In order to help all small businesses Microsoft launched low cost .

Be RealisticAbout the Cost of Money

Many small business owners financetheir ventures by running up big balances on their personal credit cards.Others tap the equity in their homes.

But self-financing isn't apractical option for larger ventures. Tom Emerson, who directs theentrepreneurship centre at Carnegie Mellon Universityin Pittsburgh,says small business start-ups should figure in the cost of capital whendetermining initial expenses and cash flow. "The cost is usually based onwhat the interest would be, were that cash invested in something with similarrisk on the market" Emerson says. "It's usually a figure that is afew percentage points or more above the prime rate."
 

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JosephAnthony is the reader & writer of