It’s February and love is in the air. (So are taxes. And Super Bowls. And bad tax software commercials – but I’ll leave those for another day.)
Flowers and chocolates showed up on desks and countertops this week with sweet little romantic notes. Restaurants set those sweetheart menus for their in-love diners. And if you’re one of the “lucky” ones with heart eyes for that special someone, you might have spent $200 (or more) on your significant other this year.
Being in love ain’t cheap.
And anyone who celebrated Valentine’s Day knows that the same dozen roses you could have bought in January were almost double their price the second week of February.
But if you’re a newbie in the love department, you might not truly understand just how much you’d have to shell out for that special someone. It’s easy to get caught unawares by the expense of it all and find yourself paying it off over months.
First-time owners have a similar experience starting a Los Angeles County business (oof… that segue).
When you thought about opening a business, you knew it was gonna be costly, but just how much? When you’re new to the game, it’s tough to fathom just how fast the money will go – let alone anticipate all of those first-year expenses.
As someone who knows well and has advised many new business owners, I want to give a little insight on this topic today. So, you can be better prepared… or to pass it along to someone who’s just now starting out.
And… if you haven’t started wrapping your mind around filing your business taxes, this is my official note to get a move on that. Don’t act like a newbie here because it’ll cost you. Let’s get something on the calendar:
Now, onto today’s topic…
Anticipating First-Year Expenses When Opening a Los Angeles County Business
“Expectations is the place you must always go to before you get to where you’re going.” – Norton Juster
When you’re opening a business, it isn’t always clear how much money it takes to get started and keep it running for a year — but it is often underestimated. A recent poll of 700 small-business owners found that more than half of them lowballed what they’d have to spend during their first year.
That’s a lot of miscalculation — and a lot of potential for having to shut the doors before you ever get off the ground. No wonder a third of small companies go out of business within two years.
All that to say: It pays to know what you’re getting into and how to survive those crucial first 12 months after opening a business.
Where does all the money go?
Surveys have shown that business owners drop from 35 to 100 grand in the first year, depending on whether their company is completely online or completely brick-and-mortar.
Here’s the breakdown: about a third for inventory, a fifth on equipment, 10% to 15% each on location and taxes, and a little under 10% each for utilities and payroll. Other common costs include insurance and marketing. New owners have said that surprise-heavy expenses have included taxes, technology, various fees, and (less of a surprise these days, for sure) shipping costs.
Where’s the money coming from for all that? Most sources are familiar: investors (such as venture capitalists and angel investors), crowdfunding, and borrowing from family or friends. The U.S. Chamber of Commerce claims that most startup “seed rounds” are around half a million to 2 million bucks.
One troubling surprise for some brand-new Los Angeles County businesses is the lack of conventional funding. Commercial business loans can be hard to come by for completely new companies that have no proof of future revenue. Many owners turn to their own money in the form of their everyday savings, nest eggs, alternative lenders (such as peer-to-peer lending, with its risks), credit cards, or personal loans.
What goofs should you avoid when opening a business?
- Inaccurate billing. Often startups do little better than throw a dart at a board to determine a price for their services (one that *hopefully* balances attractive fairness and eventual profit). A year’s experience can be a pricey teacher if you underestimate initially and fail to adjust what you charge.
- Blending personal and business expenses. Business bank accounts and bank cards should be opened before the first service is rendered and kept strictly for business — documenting tax deductions being just one of the many reasons.
- Skimping on professionals. Get the best lawyers and tax pros you can afford. They’ll pay for themselves in a surprisingly short time.
- Failing to keep an emergency fund. As solid as this advice is for household expenses, it’s even more important in business.
- Discarding receipts. Cash register tapes, invoices, canceled checks, proof of purchase of furniture or machinery … Your biz accounting, particularly in a first year when your company might operate at a loss, depends on deductions and documentation. Invest in a good document-tracking system — or at least a good filing cabinet.
- Not following the money. Expenses should be evaluated constantly to make sure income is keeping pace with outlay. Not keeping up with invoicing or billing (not to mention knowing when and how to charge sales tax) can quickly turn into late fees, interest, penalties — essentially wasted money.
- Putting sales ahead of profit. How much you bring in is not necessarily how much you make after expenses … That’s easy to forget in the thrill of a new business.
Small-business owners in the poll we mentioned brought in between 50 grand to the very low six figures in their first year — respectable, but not all profit. In fact, only 15% of business owners polled started to turn a profit in under a year (the percentage jumps to 2 out of 5 in the second year).
Plan to survive your first year of business right when that year begins by figuring out your startup costs beforehand. The U.S. Small Business Administration has a calculator for this; we can help, too. Also, sooner rather than later:
Visualize your ideal client. This concept will evolve, of course, but you don’t necessarily want to take every client who happens to walk through your door. Don’t try to be everything to everyone. That goes for every marketing or networking event, too — don’t be invisible, but don’t spread yourself too thin, either.
Trim costs early on. The bag lunch? Public transit instead of driving your own car? Do you really need all that office space right from the get-go?
Keep your business plan nimble. Things will change more than you can imagine. Be patient and keep your eye on your goal, but adapt along the way.
The process of opening a business is too important to wing it on your own. Ideally, you want other professionals around you, helping you get off the ground or keep flying. Feel free to count us in.
Getting you started right,
Victor M. Quinones