By Sarah M. Asio, Texas Tech University.
Hard economic times! There is a common notion today that the economic times are hard and breaking even is difficult, if not impossible, for the average entrepreneurial initiative. As if finding a job was not already tough for the new graduate, getting started on a business venture is even tougher and daunting for the inexperienced entrepreneur. So how does one begin? According to the U. S. Small Business Administration – SBA (www.sba.gov) the first step is to determine expenses for the start-up and apparently, it is not rocket science. With some help from “Engineering Economics” fundamentals on cost estimation techniques for both capital and regular expenses, and a simple two-stage process suggested by SBA, one can begin by estimating initial start-up costs such as:
- Incorporation Fees
- Permit and/or License Fees
- Down-payment on office space or rent for a commercial lease
- Office furniture and supplies
- Initial inventory
- Signage, Business cards and stationary
- IT/computer equipment
Followed by estimating on-going costs or regular expenses such as:
- Your salary, employee salaries, wages, and commissions
- Rent, Utilities, Internet, phone, etc.
- Professional services, such as an accountant and a lawyer
- Taxes and Insurance
- Marketing and Advertising
- Website hosting and maintenance
- Loan Payments.
After estimating costs the task of identifying sources of capital follows. While a few entrepreneurs have convinced the investors on “Shark Tank” that they are worth a shot, what happens to the other 99.9% plus that cannot make it to the TV show? One can always begin by looking at their own savings or personal Income to determine what proportion of the costs they can cover, followed by other avenues such as loans, investors, and to bring it closer to home – relatives (although this comes with its own pros and cons that will be left for a future discussion). Similarly, Investors come with their share of demands, among which is a percent stake in equity; let alone the need for the entrepreneur to show a clear road-map to profitability and the break-even point of the venture.
Unlike well established Non-profit corporations which may be unscathed by tumultuous economic cycles and are not necessarily under pressure to break-even, profit –making firms cannot afford the same luxury. The typical CEO may be wringing his/her hands and ardently trying to figure out how the firm can breakout with the next new product or service that will give the company a competitive edge. This presents opportunities for start-ups to pitch business ideas to industry power players and hopefully set off on a high gear if all goes well rather than risk being squeezed out of the market by long-standing establishments. Apart from the financial considerations presented here, an entrepreneur would require formal and legal advice from experts such as certified accountants, lawyers, business analysts, and perhaps a board of directors or trustees.
Share your thoughts or comments below. From an “Engineering Economics” perspective, what cost estimation techniques would you use to provide estimates to the costs listed above? Identify a technique relevant to each cost item. What strategy or strategies would you adopt in order to increase chances of breaking even in a business start-up?