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Figuring Out How Much Capital You Need

January 07, 1998

If lack of financing is a major obstacle to starting your business, take heart. Many small businesses start on a shoestring.

Almost half of all new businesses begin with less than $5,000 in total capital, according to U.S. Census and Federal Reserve surveys. Then again, some entrepreneurs invest hundreds of thousands of dollars in a business venture and fail without knowing why.

The amount of money with which you start your business is no guarantee of success, said Debra Esparza, director of USC's Business Expansion Network.

Whether you have only a few dollars or a lot, you can drastically miscalculate the amount of capital needed to get the businesses started on solid ground.

"Where people misjudge is figuring out how much working capital they'll need," Esparza said. "If they just do the part that gets the store open, then they don't have enough money to run it."

Esparza divides start-up capital into two major categories: one-time capital expenditures--your basic start-up costs--and ongoing, fixed expenses--the money you'll need to open your doors and go to work.

"People don't realize how much it costs to actually run the business," Esparza said.

Typical cost factors--some fixed, some variable--are listed below.

One-time capital expenditures: These include the basics to get your business started.

* Equipment--Be sure to compare the price of new and used equipment. Don't forget to include basics such as desks, chairs and file cabinets. Obtain bids on the items you would consider purchasing. Three bids are generally enough to get a good idea. In a buyer's market, negotiate for delivery or installation.

* Fixtures--Fixtures typically include items that are fastened in place but can be removed, such as signs, storage shelves, lighting, checkout counters, showcases, display counters, partitions and paneling. Obtain at least three bids, and consider new and used fixtures before buying. Items can be purchased at liquidation prices at auctions.

* Inventory--Retail stores in particular must budget start-up inventory carefully. Market and client profiles you have obtained will be invaluable in determining which product and quantity you should stock. Other businesses may need certain raw materials in inventory. Compare and consult with two or three suppliers and vendors.

* Leasehold Improvements--Improvements that usually can't be removed if you move to another location, including carpeting, electrical wiring, plumbing and bathroom installations, permanent wall partitions, windows, sprinkler or security systems, heating and air conditioning and interior design. Plans and permits are often required and costs can range from $5 to more than $100 per square foot. Bids are a must for this type of expenditure. Consult with your landlord for favorable terms or cost-sharing.

* Licenses, Permits and Tax Deposits--Don't forget to include taxes, licenses and permits in your start-up budget. You may be required to post a deposit for the amount of sales tax you may collect during the first three months. For example, if you project $20,000 in sales during the first three months, you may have to deposit 8.25% ($1,650) with the State Board of Equalization when you apply for your resale number.

* Professional Services--Expenses for attorneys, accountants, management consultants or sales representatives are not always included in start-up costs. But like purchasing insurance early on, engaging these services at the beginning of your business provides peace of mind and added expertise. Some professionals work on a retainer, a fixed amount per month, and others on a negotiated hourly rate.

Ongoing, fixed expenses: These are typically monthly expenses.

* Rent--Usually a landlord requires first and last month's rent to enter into a lease agreement. Some require a security deposit. Be sure to read the fine print before you sign an agreement.

Some landlords whose properties have been vacant for some time may be willing to offer the first month rent-free or forgo a security deposit if the tenant agrees to sign a longer lease.

* Utilities--Phone and utility deposits are often based on the number of lines or your projected usage. Don't overestimate usage because you may end up with a larger deposit. Also, make sure you understand the conditions on the deposit. Some are refundable to you after a certain time or after a series of prompt payments.

* Salaries--Although it's unlikely that investors or banks will give you the money for your own salary during the beginning months, that amount must be budgeted. If you will be hiring staff and employees immediately, you should budget for their salaries, taxes, insurance and benefits.

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