So first of all – congratulations! Starting your own business takes guts and entrepreneurship is a key driver of our economy. So bravo and thank you for taking the big leap. At the risk of “raining on the parade”, we can’t ignore the hard truth out there which is that most new businesses fail within the first two years. And while we know that a good business model incorporates many factors outside of accounting we want to do our part to help you know whether or not your business is financially sustainable for the long haul.
- Initial costs to launch – start-up costs vary significantly depending on your business model, industry, market, etc. The bottom line is you need to be realistic about what it’s going to cost you to get off the ground. The more research you can do up front the more accurate the numbers will be and the more you will be able to show investors you’ve done your homework. Don’t forget to add some cushion for unforeseen costs.
- Pricing your products – finding the “win-win” pricing model might be the hardest part of ensuring your business is ready for the long haul. There is a delicate balance between your costs and what your customer is willing to pay for your product or service. Once you set a price – adjusting it can be even trickier. Take the time to understand your market and your costs and think about trends affecting both.
- Don’t forget about the indirect costs – in addition to whatever it costs you to manufacture your widget or provide your service, there are going to be indirect costs. Indirect costs include items such as attorney and accounting fees, insurance costs, advertising, state imposed fees and taxes, etc.. While indirect costs may be a smaller part of your budget, failure to include them could have a significant impact on your start-up.
- Fixed and variable costs – it’s really important to understand the difference between fixed and variable costs. In short, variable costs change with your level of production (think materials cost for any given product – the more you make the more material you need) whereas fixed costs are the same regardless of how much activity your business had during any given period (think rent – your landlord doesn’t care how many widgets you made last month). The key is to not over-commit on the fixed costs side and know exactly how to adjust your variable costs as your business needs change. For example, as your starting out, it may make sense to hire an outside bookkeeper vs. a full-time employee as the long term commitment is less and you can keep this cost out of your “fixed” bucket.
- Raising funds – there are various ways to obtain capital for your start-up. For purposes of this post, we’ll focus briefly on debt vs. equity. Debt is generally more readily available as most banks offer some sort of small business loan package. Equity typically starts out with a “friends and family” round and progresses once proof-of-concept takes place. The biggest difference between the two – control. Banks are looking to ensure they make their money back at the market interest rate. They want to make sure their funds are collateralized and secured but they won’t tell you how to run your business. Equity investors feel they are taking a bigger risk and generally are looking for a bigger rate of return (if they wanted the going interest rate they would stick their money in the bank). Depending on the level of investment, an equity investor may have a say in important company decisions and may even look to have a seat on your board. There are risks and rewards to both funding mechanisms and the key is to understand and be comfortable with what you’re sacrificing for that upfront cash influx.
Wondering what to look for in a CPA for your new business?
From the get go you should look for someone who is willing to invest their time in your idea. Accounting is more than just putting numbers on a page. Find someone who is reputable and listens closely to understand your needs. Have lunch with them before committing and make sure you actually enjoy having a conversation with that person. With the right fit, they will bring valuable information to the table with all of your biggest business decisions. The fact is you don’t need a CPA to handle your books or even your tax return but you do want one. Quite frankly the upfront cost savings of going with the lowest bid tax prep shop can result in big headaches and potentially big money losses as your business matures.
Hungry for more?
Through our volunteer work with local organizations that cater to start-ups and our experience assisting clients to navigate through this endeavor, we’ve made a lot of contacts. We’d be happy to connect you with some additional resources to ensure you give yourself the best chance for success with your new business.