Learn the Real Cost of Starting a Business
The elusive but enticing $100 start-up — consider it the Big Foot of the entrepreneurial world. Time and time again, wannabe entrepreneurs are told that the $100 start-up is possible. That by following the advice from this or that “expert,” you can create a business doing something you love, and all you need is a quick and easy $100 investment. This line of thinking has become so prevalent in the start-up world for that serial entrepreneur, and it absolutely must be debunked. There is no such thing as a $100 start-up.
Okay, it’s possible that there may be a few rare entrepreneurs who’ve launched a business with less than a hundred bucks. But don’t count on it happening to you. Like the handful of genetically gifted world-class athletes who can run a sub-four-minute mile, they are the exception rather than the rule.
I’ve started many, many successful businesses, and I have always tried as hard as possible to do it for the least amount possible. And I’ve never been able to do it with only $100. Neither have any of my entrepreneur friends, nor have any of the individuals I’ve coached. And there’s a reason for that: You need at least $3,500 to $10,000 to start a business.
Even if you’re going to be the chief bottle washer in a micro-business, as many of the “$100 start-up” proselytizers preach you should do, you’ll need start-up funds in the range of $3,500 to $10,000. And that amount is still quite low for a business, especially one where, if you play your cards right, you should be receiving a threefold return on your money within two years. I say all of this not to discourage you from starting a business, but to encourage you to take the necessary steps to make sure you get started the right way.
To further explain, I will now discuss the real cost of starting a business.
You’ll need a cash reserve. A cash reserve is a “stockpile” that will be there in case of an emergency. It can be large or small at the outset, but it should be equal to your operating expenses for a projected period of interruption in which your business may be unable to generate new income.
Obviously, if you’re launching your business with $100, you’re not going to have much to put toward a reserve. What would it be? Maybe $20 or even less than that? If you reverse engineer expenses for even the lowest entry-level start-up, that is still a comical amount to have as a cash reserve, and it won’t be able to protect you when you do hit an obstacle.
You’ll need money for marketing. Marketing is not optional. You will have to budget a portion of your $100 to marketing efforts. So once you’ve exhausted your friends and family, how will you attract enough customers to sustain a long-term business?
If your answer is word of mouth, think again. Word of mouth is great, but it is highly unlikely that you’ll be able to bring in enough customers through word of mouth to sustain a successful business. You’ll probably have to turn to TV, radio, direct mail, and other notable marketing tools.
I’m a huge believer in direct mail, and it is usually the least expensive advertising method, so let’s single it out. How far will your $100 get you? Well, the cost to print a postcard, even when using an inexpensive DIY site like Vista Print, will be more than $100. Then, what about postage? If you’re sending your postcard to a respectable amount of potential customers, say 10,000, the postage alone will be way more than $100. That start-up money is dwindling fast!
You’ll need a website. A website is an integral part of business marketing and advertising. Most of your prospective customers, even those born during the heyday of radio and television, are surfing the Internet. Developing an online presence is as essential as having a business card.
The good news is that websites are much more cost effective ways to advertise your business than advertising on TV and radio, which have shot through the roof. But even on the low end, you’ll need to spend about $20 to purchase two years of web hosting.
And what about design costs? Oh, yes, all $100 start-up entrepreneurs are ‘technical savants’ who can create DIY websites with all the bells and whistles. And are you also a search engine optimization (SEO) wizard? I certainly hope so, because you won’t have any money left over in your $100 budget for SEO.
You’ll need to factor in administrative services. In the beginning, you’ll probably need an attorney to help you draw up agreements for your services. Good luck finding an attorney who bills at about a penny an hour! And sure, you or a friend or family member might be able to do the initial bookkeeping for you, but eventually you’ll need to partner with someone you can call on a more long-term basis.
You’ll also need an accountant. And again, you won’t have much to budget toward an accountant from your already exhausted $100. You’ll also need to think about the cost to incorporate. In my state, that fee alone is $100.
You’ll need to cover miscellaneous expenses. Once again, we must assume you’ll acquire for free all those items you can’t buy with your $100 budget. For example, business cards, forms/documents, file cabinets, desks, a phone, a cash register, and the list can go on and on.
And who will be answering the phone at your new business for free? Using your personal cell phone and answering it yourself won’t be very impressive to your first-time customers. You’ll need at least one employee or a virtual assistant or an answering service. Again, I understand the $100 start-up is based on you, the new business owner, doing everything, but at some point your enthusiasm and energy will lessen because you’ll be overextended, and it is then that your $100 start-up becomes your $100 nightmare.
Remember, according to the Small Business Administration, only about half of all small businesses survive more than five years. So instead of trying to defy the odds with a hundred-dollar bill, why not work a little harder on the front end in order to shore up your odds of success? When applied responsibly, these real-world financial principles will help you to become the entrepreneur you’ve always wanted to be. HBM