Your business plan will determine how much money you need to develop your idea and take it to market. Consider both initial and ongoing costs. You should work closely with your accountant to ensure that you have considered all costs, and that the investment is likely to be financially viable.
If you already operate a business, some of these costs may not be needed or may be absorbed into the business.
Some initial costs include:
- research and development costs
- licences, and regulatory and permit fees
- accounting, legal and other professional fees
- equipment costs
- initial advertising and marketing costs
- a bond for your premises
- remodelling costs
- fixtures and fittings
- connection fees for phones, lights, water, and other utilities
- purchase of initial stock and supplies.
Early seed capital
Early seed capital refers to the initial cash injections required to start up a business, protect intellectual property, develop prototypes, field and market test the product or service and conduct market research. Entrepreneurs must understand that the fundraising process is continuous, with each stage involving some level of equity dilution.
Investors expect a return for their investment, usually some of the shares you own in your business. Raising early seed capital remains one of the most difficult challenges facing a business.
The usual process to finance the earliest commercialisation or proof of concept efforts of the venture is for entrepreneurs to use their own resources, or that of other individuals, including family, friends and past business associates. Entrepreneurs may rely on access to bank loans, grants or gifts to fund their initial research and set-up. While the amount of early-stage seed financing required by pre-startup businesses varies widely, the cash involved covers only basic business establishment expenses, early prototyping, market research and protection of intellectual property.
During initial development, consider the following:
- develop a framework for a business plan
- compile a brief document outlining your vision of the business and seed capital requirements
- how will the final product or service will be commercialised
- selling (assigning)
- production and distribution)
- capital and human resource requirements
- undertake a feasibility study – assess the technical and marketing viability of your technology
- revisit your business plan regularly throughout the commercialisation process
- access financial assistance – seed and early-stage grants for developing technology may be available to your venture, although there are strict eligibility requirements
- collaborative research agreements with other complementary organisations interested in developing your idea are another means of accessing early-stage assistance (either financially or technically). You would need to define inputs and outputs of each party, as well as the intellectual property rights and ownership of the idea being developed.
Ongoing costs are the expenses usually covered by your working capital. Often businesses fail to obtain enough funding to cover the expenses incurred during the initial months of business. It is important to remember that it may take 6-18 months before the business breaks even. In this period, you must maintain a cash balance to pay bills, debts and other costs as they fall due.
Some examples of ongoing costs include:
- costs incurred in getting your products and services ready for sale, such as
- shipping costs and transport
- rent or mortgage repayments
- interest and loan repayments
- wages and salaries
- rates, electricity, gas, water (utilities etc.)
- stock purchased for resale
- petty cash
- ongoing advertising costs
- bad debts
- slow payers
- temporary staff.
It is useful to also budget for a contingency to cover unexpected costs.