Before taking a second mortgage, use these rules to calculate the real costs of starting a business.


Have a solid plan - then change

Most creation stories of companies say they have to have a business plan. And it does. But that's not the beginning and end of figuring out your startup costs.



Jeff Shuman, who directs entrepreneurial studies at Bentley College, says: "The conventional wisdom is that an entrepreneur sees an opportunity, comes with a business plan to capitalize on it, determines the capital that must be raised, raises the capital and then applies it to building the business described in the business plan. "



There is a big problem with that model, according to Shuman. Everything depends on getting the business from the outset, and that does not happen often. "Actually, it is likely that some of its initial assumptions are pretty good and others are not going to be worth the paper they are written on," he says.



Shuman and others say that figuring out your start-up costs means regularly reviewing your assumptions and changing your initial model. Writing a plan is good because it forces you to write down everything you will need to start your business.



But this initial plan is likely to change repeatedly as you learn new things and incorporate them into the plan.


Be prepared to withdraw

It is tempting to add all the ingredients for a full-fledged business you imagine, and decide what you need to start.



But pulling back and looking for a smaller model can give a way to start at the same time save money. Shuman uses the example of someone who calculates the total cost of starting a retail business in a local mall.



"You could start that way and write a business plan based on that amount," he says. "But it might be better to rent a stand and testing what the demand for the product there."



This consumer testing reduces commissioning costs. The result is that the initial cycle of your business is not so much to generate benefits in terms of information generation. "With this, you can finance your business on a cycle by cycle basis," Shuman said. "When you go for the second and to expand its business, the numbers are based not on focus groups or surveys but on real-world experience."


Calculate the price and time correctly

Calculating your initial cash flow is part of figuring out your startup costs. It is an area where businesses are sometimes less optimistic than they should be. "Small business owners may under-price their product or service, thinking they have to enter at a lower price point to compete," says Barbara Bird, who chairs the business management program at an American university. "They do not have to do that."


Correctly estimate its launch Time

Yes, to start a business, time can be money. Let's say you're going to have fixed costs, such as a monthly lease. If you have to make improvements to a space before you can actually open for business, fixed costs will be higher initial costs until you can actually open for business. I have seen many entrepreneurs to develop a timetable for their companies and get a slip in safety requirements and inspection imposed by local agencies.



For that reason, I think one of the first places future new business owner should go is a local government planning or licensing department. Building permits and inspections can push a prospective opening date back a month. If you do not take into account the cost of this time, you could be working on this short of capital in output.


Be realistic about the cost of money

Many small business owners finance their businesses through the implementation of large balances on their personal credit cards. Others tap the equity in their homes.



But self-financing is not a practical option for large companies. Tom Emerson, who directs the entrepreneurshipthe center of the Carnegie Mellon University in Pittsburgh, says start-ups should be included in the cost of capital in determining initial expenses and cash flow. "The cost is usually based on what the interest would be, were that the money invested in something with a similar risk in the market," says Emerson. "It's usually a figure that is a few percentage points or more above the prime rate."