After no market need, running out of funds is the 2nd most common reason that startups fail according to CB Insights research. Money and time are finite and need to be allotted carefully while starting a software business, or any business in that matter. Development isn’t the only cost that you need to be budgeting for on your startup journey. Have you thought about a budget for expenses like software maintenance, support, marketing, and sales? If not, we’re going to be taking a look at costs you may not be thinking about as you’re getting started.
Types of Costs
Your business’ fixed costs are the expenses that do not change when sales or product volumes change, whether it be an increase or decrease. These costs are not directly related to delivering a service or manufacturing a product. They typically are expenditures that do not fluctuate over long periods of time, usually over a year or more.
Examples of fixed costs include: property taxes, rent, long-term software licenses, and the salaries and cost of benefits for non-sales and management team members.
On the other hand, variable expenses fluctuate when sales and production increase or decrease. Variable costs, sales, and production volumes rise and fall by the same percentage. These are generally considered to be expenditures that can change in the near future, typically within less than three months.
Materials, manufacturing, labor, and amortization are examples of variable costs. Other examples include software licenses that charge per-user, contractor costs, training, and the incremental storage and server capacity required to support near-term growth.
You already know that becoming an entrepreneur isn’t easy as pie. You’ll need resources, some of which you may have, and some that you may not have right now. Take stock of your current resources and think about what challenges you might face that could create a new resource need as you grow. For example, let’s say you’re considering hiring someone to manage marketing and customer service for you and another to take care of sales. You’re already aware of the human resource need, but you also must consider the possibility of needing physical resources for these new hires. Computers and even an office space are two physical resources you might need to invest in to correlate with the company growth.
We can break down most resources into five categories.
Funding is obviously the most important type of resource needed as you start a business (and the reason you’re here reading this article)! Funds can be obtained from a variety of sources. Common sources include:
- Personal account of you, the founder
- Loans and lines of credit from banks
- Investments from friends and relatives
- Private investors
- Grants and loans from private and public sources
There are resources available to any type of entrepreneur with any personal situation, so don’t fear. If you’d like to learn about 4 types of debt-free funding, check out our article here.
Having a strong team can bring great success to your business. Having experienced people on your side can give a huge boost in areas like efficiency and customer satisfaction, but there is a cost behind having them. With more hands on deck, more work can be getting done. They can offer new expertise and fill in any gaps in your business. If you need assistance finding good hires, another cost to consider is help from a staffing agency.
Never stop learning! Having more industry know-how and understanding of the competition will help you make more informed decisions on how to move forward with your business. Local chambers of commerce, professional trade associations, and the Small Business Administration are all good places to start looking for resources.
Even if you don’t have a physical product or need for a retail space like some businesses, it’s likely that you will have some physical resource expenses. This can include anything from an office space, a telephone line, server costs, computers, among any other equipment needs. Expenses like marketing can also be noted under this category of resources.This category of resources can be one of the costliest, so be sure to budget accordingly before making purchases.
Starting your own business can put a large amount of stress on you. Trust us, it’s no walk in the park. Having a support team to back you up is integral to staying motivated and keeping sane. Some of these resources are free, some of them might need some time and money investment. There is no right or wrong amount of support here, some people just need their family or a few close friends. Finding a mentor or professional group of entrepreneurs (like the Founder Community) can be extremely helpful as well since those folks have experience with what you’re dealing with and can offer advice and guidance. There’s always counseling and therapy available in your local area as well. Seeking a little mental health boost from a professional is never a bad idea, especially when so much is on your plate.
Burn rate is the pace at which your startup spends money before becoming profitable. You can calculate it over different periods of time, like per week or month. For example, to figure out your monthly burn rate, take your expenses from a single month and subtract any income you bring in during that time. Take what you have left in your account reserve and divide it by that monthly burn to find how many months your business can go without a change in income. This is called runway. For example if your monthly expenses were $15,000 and you have $100,000 in your funds, you’d have about 6 and a half months of runway.
Creating a Contingency Plan
Disaster can strike out of nowhere. Startups like yours usually don’t have deep pockets to float over unforeseen catastrophes, so that’s where a contingency plan comes in to help. Having a backup plan will lessen the impact of any unforeseen disasters and help control the outcome.
A contingency plan lays out the course of action for when things go wrong, but where do you even begin? Here’s the steps you should take to write your emergency plans.
- Identify & Prioritize Resources
Take inventory of the resources your startup uses that we discussed earlier. Which are most important that you cannot do without? Which could you let go of in case of an emergency? Which are absolutely critical to your business’ operations?
- Pinpoint Key Risks
Take some time to research and identify possible threats to your startup and its resources. Reading about other entrepreneurs’ past situations can be a good resource to learn about possible threats and pitfalls. Another good resource to use while brainstorming risks are your allies, peers (like in the Founder Community), employees, and investors. They might offer a different perspective and be able to think of things that could have negative impacts on your business if you’re having trouble finding risk areas.
- Order Risks According to Priority
Rank your newly written list of threats according to priority or urgency. Rank the ones that are more likely to occur and could cause the most impact at the top. Place the risks that are least likely to occur lower down in your list.
- Draft Your Plans
Write a contingency plan for each scenario on your list of key risks. Create an order of action to immediately follow when the given scenario starts. You can draft it in the form of a flow chart if you’re a visual person. If you have employees or partners that would be assisting you, task out the steps accordingly so everyone involved knows what they should be doing when the time comes. Use this time to place yourself in the very situation, don’t just think of it as “what if”!
After assessing all of the possible situations that could be detrimental to you and writing detailed instructions for yourself, you’ll be as prepared as you can be if disaster does strike. You’ll be able to react swiftly and control what you can.
Creating a P&L Statement
A profit and loss statement (or P&L for short) summarizes the revenues, expenses, and costs incurred over a certain period of time. Oftentimes P&L statements are made yearly. It is synonymous with an income statement. There are five main categories of data you’ll find in a P&L statement.
- Revenue – All the money your business has made is normally listed first.
- General expenses – How much it costs your business to make money is usually next.
- Costs of goods sold – How much you spend in time and materials to produce and/or maintain your product.
- Other expenses – Includes things such as taxes, interest
- Net Income – Typically placed at the bottom line at the conclusion of the statement.
But why should you take the time to create one? A great reason to complete a profit and loss statement is to review your net income, which is essential for making sound business decisions. Net income (also called net earnings) is calculated by taking your revenue minus cost of goods sold, general expenses, taxes, and interest. Reviewing all your expenses and revenue in one place can help you decide where you need to make changes and if you’ve met any revenue goals.
Want to Learn More About Funding?
There are multiple facets that go into funding your startup. We’ve discussed 4 debt-free ways to fund your startup, reasons not to get an investor, as well as grants for innovation in North Dakota and Minnesota. If you want to learn more, check out these articles.