Understanding business start-up costs

Courage and energy are needed, but rarely enough to start any business. Proper financial planning for necessary start-up funds must be included in every business plan.

Entrepreneurs need the ability to create and manufacture a product (or service), market it, and most importantly, manage all aspects of starting and running a business. Primary to this is the understanding that, “just getting going” is a sure scenario for failure. Business plans are used for both future endeavors and launching the rocket to success.

Start-up costs are always a critical component of a well thought out business plan for getting the door open. Moving product out the door takes proper financial planning, including having a (literal) door to move it out of. The cost of licenses and awareness of zoning regulations affect the suitability of any location. In the food business, it is necessary to purchase a license that represents your ability to produce your product safely and in compliance with relevant regulations. This could also include training and certification costs for yourself and your staff.

Financing of the location is also vital. Kitchen incubators offer a low-cost method of getting started. Production space costs are directly related to the time used and are easily calculated. Renting or purchasing a free standing facility comes with greater risk and the need for more capital. Correspondingly, most kitchen incubators will already have the equipment you need and the cost of its use is tied to production. Purchasing equipment, like a facility, raises start-up costs as well as the need for reserve funds related to maintenance and repairs.

Are you hiring staff? They will have every expectation to be paid regardless of your cash flow. Sixty to 90 days of potential labor expense will provide a comfortable cash cushion. Will the staff have to be trained or certified before any product is made? Add in this expense to your start-up costs.

Incoming raw ingredients will need to be paid for. Will your suppliers offer terms to you? Converting those raw ingredients to packaged, ready to sell finished goods will tie up cash for a period similar to paying your staff before selling (and collecting) takes place. What terms will you offer your customers? How will this affect your cash flow?

An often overlooked start-up cost is the need for marketing your product or service. A marketing plan is an essential section of your business plan that you must make allowances for. Knowing who your target market is, how your message will be communicated and by which channel will be utilized drive this need for up-front cash. Super bowl ads may be out of the question.

Start up cash also, should include cash. Cash is the lubricant which greases the wheels of commerce. Having a sufficient amount set aside when beginning any business will reduce the friction that can be caused by financial embarrassment.

Michigan State University Extension Educators working with the MSU Product Center – Food, Ag, Bio assist business owners in planning and implementing business strategies.

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