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How Much Money Do You Need To Start A Checking Account
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Many entrepreneurs start businesses with little more than a dream and a shoestring budget. In fact, some business models require very little start-up costs, and at , we have personally witnessed the success of countless entrepreneurs from humble beginnings. But among small businesses that start up and don’t last, more than a third cite a lack of cash as the reason.
? And do aspiring entrepreneurs have any misconceptions about what those costs will be in their first year of business? In October, we surveyed 150 aspiring entrepreneurs and 300 small business owners across the United States to find out just that.
According to our research, small business owners spend an average of $40,000 in their first full year of business.
We also asked our respondents to take it a step further: We had them look back at their records from the first year and tell us how much money they spent on various business expenses as a percentage of their total budget. For simplicity, we have grouped the following functions and cost categories:
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It’s important to note that the amount companies spent in their first year varied significantly, depending on factors such as industry and business model; whether the business was a full-time, part-time or hobby business; and whether the company had additional employees. But more on that later.
While new entrepreneurs often rely on their personal savings to keep their business afloat in the early days, a third of respondents reported reinvesting their businesses’ sales revenue to cover their business costs in the first year.
Accepting that your first year of business may not be very profitable is important for both financial planning and mental preparation. Many founders are the last to get paid in their first year, as all of the company’s revenue goes back into the business. That is perfectly normal.
For businesses that struggle to make sales in their first year, creating a complete financial plan with how much you’ll need and how you’ll use it will make it easier when applying for or trying to get a small business loan. to attract investors.
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Don’t think of this as borrowing—start-up expenses are necessary to generate income, so the return on your investment is likely to be greater than the initial costs.
Perhaps not surprisingly, having employees dramatically increases overall spending. If you decide to go the solo business ownership route, you can spend less than a third of what businesses with employees spend.
In addition to fixed costs, business owners also pointed to common one-time costs that arise in their first year and warned of hidden expenses to be aware of.
Recurring expenses and fixed costs are only part of your financial plan: hidden costs, one-time costs and variable costs should also be considered in advance. What if an unexpected event (eg, a pandemic, a recession, or both) throws your projections off? It’s always a good idea to do contingency planning and set aside a cash reserve, just in case.
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When we asked our aspiring entrepreneurs how much they thought their first year of business would cost them, they overestimated one area: they expected online costs to be more expensive than established business owners reported.
Business owners who expect to spend more to start a business may end up paying more than they should. The reason is simple: if entrepreneurs expect to spend more on a service, what they are willing to pay for that service increases accordingly.
The perceived cost and complexity of launching and scaling an online business remains a barrier to entry for many aspiring entrepreneurs. But it is largely unfounded. In turn, our core principle is to enable those entrepreneurs who have no coding or design skills to create an online store. And do it at affordable prices.
Our research backs this up: Of the 300 business owners we surveyed, we found that customers spent an average of $38,000 in their first year, compared to non-customers who spent an average of $41,000 in their first year.
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Just because a business owner managed their budget a certain way the first year doesn’t mean it was the right way. In fact, most of our respondents admitted that, in retrospect, they would have spent their money differently in their first year.
To provide better guidelines for aspiring entrepreneurs, we decided to take a closer look at the data from companies that reported higher earnings in their first year to see what decisions may have contributed to their financial success. Here’s what we found.
Companies that posted higher revenue in their first year spent significantly more on equipment costs, nearly a third of their total budget.
The relationship between revenue and team costs may seem obvious: if you make more money, you can pay yourself and hire employees. But the relationship goes both ways: adding members to your team can also drive revenue growth.
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And while going it alone makes good business sense at first, it’s worth noting that there’s a ceiling to this approach. When you’re a solopreneur, you have limited resources—they start and end with you. You are limited by the skills you possess and the skills you are willing to learn.
Many entrepreneurs reach a milestone in their career where they need to weigh the financial costs of hiring help against the time costs of doing everything themselves.
It’s important for entrepreneurs to know what red flags to look out for that indicate it’s time to hire help. Some red flags include turning down work because you can’t keep up, seeing the quality of your product or service suffer, or seeing the quality of your sleep or mental health suffer.
Don’t put yourself in a position where you’re stretched so thin that you can’t run your business sustainably.
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When we asked business owners, “How much did marketing make up as a percentage of your overall budget?” we found a significant relationship between marketing spend and revenue.
The less money a company made in general, the more it spent on marketing. And the reverse was also true: the more money a company made in general, the less it spent on marketing.
If you’re overspending on marketing without a clear return on investment, it could be an early sign of bigger problems, like a website that doesn’t convert or, worse, a weak product-market fit. It is imperative that business owners obsessively track, report, and review their marketing efforts on a regular basis.
Still, marketing is more of an art than a science, and getting the budget right at the start is difficult. Spend too little and you won’t get your brand in front of buyers; spend too much and you’re less likely to break even.
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Our findings, as well as findings from experts at the US Small Business Administration, suggest that the sweet spot for a marketing budget for an early-stage B2C business is between 7% and 12% of revenue.
Again, the costs of starting a business vary widely and depend on many different factors such as the industry you are operating in, your business model, the size of your team, the cost of goods, etc. Ultimately, there is no right or wrong amount of money to spend in your first year, it’s all about how you spend what you have.
Still, after looking at trends among high-revenue companies and consulting startup advisors, there seems to be a general range of what you should spend in each cost category in your first year:
Remember: starting a successful business is a marathon, not a sprint. It is critical then that you don’t measure the success of your new business by its first year’s profitability. Give yourself an 18 to 24 month track to take off. Spend the first year of opening your online store testing, iterating, and reinvesting your sales back into your business using the budget guidelines above.
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Being an entrepreneur requires a certain appetite for risk. But with the right information and a clear sense of your financial goals, you can avoid many of the financial mistakes common to new entrepreneurs. And with the right e-commerce platform, managing all the other moving parts is also much easier.
*All cost of starting a business in 2020 is based on survey data collected in October 2020 from 300 small business owners and 150 aspiring entrepreneurs in the United States. All values are rounded averages. All data is unaudited and subject to adjustment. All financial figures are in USD unless otherwise stated.
Many businesses can be started with little or no money. Try a dropshipping model, sell digital products, or start a print-on-demand business since they don’t require you to hold inventory. Any business you can start from home will save you overhead so you can start growing it.
The answer depends on the type of business