Cash is always tight for a startup, but things will be particularly tight during the pre-revenue phase of your business. Many startups have a period of several months before they make their first sale. You might need to spend time developing your product or service, renovating your storefront, or building a team of employees before you are ready to start selling. This means you will be draining cash quickly, so you need to make sure you are able to accurately predict your startup costs. There are 3 common startups costs that are often overlooked during planning, but can kill your cash flow.
1. Deposits – Many times you will be required to make an up front deposit for things like rent or utilities. You may get these deposits back at some point in the future, so it is not really an expense per se, but it is still a use of cash during the startup phase when cash is hard to come by. It is reasonable to pay at least 1 month of rent as a deposit, so make sure sure to include this in your startup cost forecast.
2. Insurance – It is easy to overlook the need for general liability insurance, but in business this is really important. For example, maybe you are starting a commercial painting business, you might think there is little harm you could do while painting that would cause someone to sue, but what if there is lead or some other dangerous substance in the paint. It could be devastating for you and your business if you do not carry general liability insurance. Sometimes you may be required to pay 6 months of the insurance premiums up front.
As you are creating financial projections for your startup, make sure not to leave out these major, yet often forgotten, startup costs. You might be thinking about leaving your day job to pursue your startup, so it is vitally important that you understand and accurately forecast all of your startup costs so that you don’t leave your day job too soon.