There is a saying, “It’s better to lose an opportunity rather than a capital.” Richard Branson used to say that opportunities are like buses, they go and come. In today’s classes, we will talk smartly about finances.

The Statistics

Did you know that lack of money is one of the top reasons businesses fail?

According to statistics published in 2019 by the Small Business Administration, about twenty percent of business startups fail in the first year. Furthermore, nearly half succumb to business failure within five years. By year 10, only about 33% survive. Therefore, I bet you do not want to belong to any of these groups. Even more, you want to be successful. 

The Basics

Your company will achieve profits only and only when all the costs are lower than the total revenue in the agreed timeframe.

For the sake of this lesson, we will not go into complicated accounting structures and financial engineering. Let’s keep it simple. Remember that at the beginning of your business journey, you will be struggling with a lack of money. Luckily for you, I will teach you what the potential sources of funds are and where you can cut costs. So, once you are leading your business, you have two sides of the equation – costs and revenue. 

Firstly, please consider some of the costs associated with your business. According to different statistics below, you will find the most common expenses to be considered while starting up your business. Luckily, you can significantly reduce many of these costs if you are starting with micro or home business. Just to mention:

  1. Incorporation fees
  2. Website / Online apps
  3. Office space
  4. Equipment
  5. Inventory
  6. Office furniture and supplies
  7. Taxes
  8. Marketing
  9. Utilities
  10. Payroll
  11. Professional consultants (incl. educational training)
  12. Insurance
  13. Travel and shipping
  14. Debt financing

On the other hand, you have a revenue stream. Your revenue can come from the following sources:

  1. Selling your product as such
  2. Royalties – it means income from others using your work or product
  3. Selling rights to your products
  4. Capital gains when assets increase in value
  5. Rental income from renting our property
  6. Crowdfunding
  7. Loan

Therefore, before you start your business, you need to consider your financial goals, your current financial state, and how much sales or clients are needed to achieve that goal. Now is the right time to determine pricing to ensure you’re charging enough to cover your expenses and earn a profit.

Budget Planning

Before you start reducing anything, the first thing you need to do is to write down all your costs. For your convenience, you can use the template “Startup Budget Spreadsheet” attached to this course. I will walk you through this quickly. 

Step 1. Set your total budget

To begin with, set your budget goal – the total amount of money you are willing to spend to start your business. You might ask why we are doing so? The answer is simple. You want to set boundaries for your budget.

Along with the planning, you will want to spend more than you can afford. Your budget goal will act as an anchor, so it will bring you back to reality when needed. Think of the amount of money you have or can obtain. 

And be aware of taking out a loan as you will have to pay it back. Certainly, only borrow what you can feasibly payback. Using your savings is ok, but do not stretch it out in your budget. Always leave an emergency fund. 

Step 2. Categorize your startup expenses

Secondly, write down everything you might think you will spend money on to start your business and put it in the attached spreadsheet. Remember, that startup expenses are not ongoing operational costs; they’re the first things you need to buy to start your business. Be as detailed as possible. Don’t just write “website setup.” Write down the specific services: domain name maintaining costs, hosting, a payments provider, traffic analytical tools, domain email address you will need to buy. By the way, we will talk about setting up a webpage that sells in “Week Two of our classes.” So you can tune your budget accordingly.

After you listed everything, split the expenses into three categories: essential, non-essential, later. 

Essential items are costs that are a must to get your business up and running. For example, this might be the cost of web hosting and online payment processing.

Non-Essential costs might make running your business smoother but are not crucial for its operation. It depends on your judgment of what you will qualify into this category. Someone might say that a non-essential item could be the cost of a designer creating a logo for you. However, I would not do that – not having a logo will kick you back quickly as you would need to adjust printouts, ads, stamps, presentations, social media profiles, and so on. By the way, we will talk soon in the next classes how to make a logo effectively at almost no cost.

Later items are things qualified as the ones to be put on hold for six months. For example, these might be costs associated with scaling your business, like mass email sending provider with pro option. 

Sum it up. Add essential and non-essential costs, and there you go. These are your estimated startup costs.

Step 3. Estimate What You Might Lose

It is essential to estimate how long you can go without making money while racking up overhead expenses. These are called your losses.

Even more, you should always estimate your losses as new business needs time to build a solid customer base. For that time, you want to include these costs into account. You will do it in two steps.

Step 1. Calculate your estimated monthly overhead expenses

These are recurring expenses that are not related directly to your product or service. Examples can include:

  • Software subscriptions
  • Payroll expenses
  • Website fees
  • Subcontractors
  • Rent for your office
  • Compensation for your time
  • Advertising fees

Step 2. Estimate how many months you will go without making money

At the beginning of your business journey, it will be hard to forecast your income. To start with, calculate the total number of sales you will need to break even and then back into that number with your conversion rate, or in another way, the likelihood that a person turns into a customer.

Let’s take an example. Let’s assume that you own a product-based business and need to earn $3,000/month to break even.

  • Your product costs $50, which means you need 60 sales a month to break even. ($50 per product times 60 sales = $3,000)
  • At a one percent conversion rate, you will need to acquire 6,000 leads a month. (One percent conversion rate = 60 sales divided by 6,000 leads times 100).
  • You plan to increase your traffic by 1,000 leads each month. Assuming that you are starting from 0 leads at the beginning of the first month It will take you six months to break even.

Step 4. Include contingency

You will not forecast all the expenses, hence a good practice is to put contingency to all your costs and treat this number as your airbag.

Above all, these are the money that should be used only in case of an inevitable emergency. The easiest way to calculate your budget pad is to go into each record of your expenses and add 10 to 15 percent of the associated amount. If you are using the attached template, this will be column D of the sample.

Step 5. Summary and review 

Now you are good to add your startup budget together and deduct your losses. Finally, the total is the estimated amount you will need to start your business. If the budget exceeds your capabilities, review it, and adjust. Maybe you can reallocate costs among essential ones to the non-essential category or even the later one? If so, please do it and recalculate your budget. Perform this until you feel comfortable with your numbers.

Ways of reducing costs

Below I will give you 17 examples of lowering your home business budget. We will keep it straight forward.

  1. Outsource time-consuming projects.  If you are not knowledgeable or skilled in the given project, hiring help can save you time and money in the long run. It is especially true in terms of bookkeeping and accounting. Additionally, if your time is worth $40 an hour, it’s more cost-efficient to hire a virtual assistant or freelancer at $10 per hour to take care of routine or mundane tasks so you can focus on making money.
  2. Reuse paper.
  3. Use recycled printer ink cartridges.
  4. Keep all your equipment clean and maintained. Install security systems to keep your computer virus-free and do regular file clean-ups.
  5.  Reduce travel costs.
  6. Use VoIP. Voice over Internet Protocol (Skype, Microsoft Teams) allows you to conduct phone and video conversations for free to other VoIP users. 
  7. Consider online payment processing services over a merchant account. As a result, the usage of an online service (PayPal, Stripe) is a more cost-effective option.
  8. Don’t fax — If possible, use digital signatures, so you don’t have to print to sign documents.
  9. Pay bills online. Whenever possible, pay bills online for free. Check your Bank for details. It saves you not only money but also time. 
  10. Use a content management platform like WordPress, Clickfunnels for your website. 
  11. Find affordable yet reliable web hosting.
  12. At all costs, avoid overdraft fees and pay your bills on time.
  13. Use free or low-cost marketing strategies. Modern times give you the possibility of being present everywhere at relatively low costs. Think about Youtube, Blogs, social media. Be everywhere. Use your social network to spread knowledge about your business.
  14. Keep excellent records and take all the tax deductions you’re allowed. 
  15. Shop around for the best bank rates. 
  16. You do not need to pay sales tax on items you resell. Check with your accountant; in many cases, you can avoid paying sales tax on materials you use to create your products or items you are going to resell. 
  17. Negotiate, negotiate, and negotiate. Do not be afraid to ask for a discount. It can save you lots of money. On the other side of the coin, there are businesses just like you – their owners need customers as well and are usually opened and ready to bargain. 

A great way of gaining money to start your business

Besides methods like using your savings, bank loan, or getting money injection from your family, there is one way that might be your “Holy Graal.” You should try crowdfunding.

According to Wikipedia, “Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet.” 

Try visit portals like Kickstarter, Indiegogo, Patreon, GoFundMe, CrowdRise, PledgeMusic, Crowdfunder, RocketHub.

Read the rules and decide if you are in.

Remember that although you might get the money you need, it carries a risk of being spotted by the competition before you even start your business. The risk is high that your Intelectual Property might be violated.

I am sure you will now be able to get your money right, and your company will achieve success. 

For those who start reading from the end of the articles, below is a summary of what you might learn from it.

  • You learn what makes your business profitable.
  • The difference between revenue and three categories of expenses (essential, non-essential, later) is no longer a mystery for you.
  • You can calculate your break-even point and startup budget.
  • You know how to reduce potential costs and where to look for funding.
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