Top 3 startup costs that can destroy your business :) #1

Here I want to share my experience in building, running, and being part of various businesses over the last 10 years. One of the most important questions that arise in people's minds while starting a business would be, how much does it cost for me to start a business?

Note: I'm not a financial expert to comment on this matter. But sure knows a few key aspects that any business founder needs to consider during the early stage of their business

#1 Fundamentals

Each business will have its own cost of setup, method of operation, and way toward profitability
        

1. One-time Expenses

Also known as Capex, this is the set of expenses that are incurred on a one-time basis during setting up your business. Examples would be rent deposit, company formation cost (setting up a Pvt Ltd or LLP, etc), inventory, and licenses (like Shop Act, PAN Card, TAN Card creation, PT, etc), this also includes other vertical-specific setups(this is optional and depends on the type of business) like machinery, manufacturing units, etc

Note: A key approach many serial business founders follow is White-Labeling. This is similar to creating a partnership created for faster market access and validating your problem statement with existing solutions or look-alikes. This process saves time, reduces costs, and increases the validations around the market, customers, and problem statement. Challenge will be to have a strong operational framework for both you and your vendor to operate. Always be transparent and create win-win approaches.

2. Operational Expenses

Also known as Opex, this is the set of expenses that are incurred on a periodic basis for your business. Consider events, like yearly tax filing expenses, accounting expenses, company secretary expenses, quarterly tax filings like GST, monthly expenses like rent, light bills, salary for your team, any consultants payments, monthly software payouts

Sharing a sample expenses document that can be used to calculte your basic expenses below ??
        

Now let's look at the life cycle of a business

In the beginning, the majority of business owners are extremely ambitious and motivated. But, with the passage of time, they eventually give up on their dreams. Why does this happen? The simple answer is that they are unable to handle startup costs.

In fact, almost?29% of startups fail during the initial 3 years?because they lack a clear vision or are unable to fulfill the costs required.

The good news is that this issue can easily be solved by evaluating the costs that are associated with the production and scaling of the product.

Startup founders should realize that coming up with practical estimates of startup costs that are required for building a Minimum Viable Product(MVP) is essential for success but they can’t solely depend on it. This is because the inventory turnover ratio also plays a major role in keeping the startup afloat.

Let’s learn how to estimate the business startup costs of an MVP.

#2 Cost of MVP

After identifying your problem statement, each business needs to build a basic product or solution that they can take to market. This first working product/prototype/solution/project/process is called an MVP, and it is crucial for the life and future of all businesses, if messed up, it can be catastrophic, leading to overall production cost failures.

While your team builds an MVP, they will encounter various costs other than the basic costs mentioned above. The challenge here is to realize that cost is not a single consolidated number for any business. It includes several sub-areas that could impact the overall validation phase of your business until you build your first MVP.

Other key aspects to be evaluated during your costing would be;

1. Direct and Indirect Costs

Costs that are associated with discrete areas of the project are known as direct costs. Examples include the cost of hardware components, fuel, and profits distributed among team members, direct labor cost, direct materials, direct software cost, commissions, piece-rate wages, and manufacturing supplies

On the other hand, indirect costs are costs that couldn’t be associated with a specific expense head. Consider the scenario; If you are building the physical product your production supervision salaries, quality control costs, insurance, and depreciation will all become part of your indirect costs

2. Time Vs Cost Penalty

Startup trainers say?three months?is the optimum time to build a startup product or an MVP. If the product fails,?you have wasted only three months which is not that bad considering starting a venture of your own. If it works, however, you can focus on the next iteration with renewed motivation. Three months is the right amount of time to keep you on track, understand costs, and help roll out MVP faster.

Remember that as you exceed the three-month mark, you run the risk of increasing the total cost that will continue to mount up in the future.

According to CB Insights, 48% of startups fail because the products they were making had no value in the market.

So, your goal with an MVP should be to build a product that you can roll out to the public while keeping a check on the startup production cost. Don’t just build an MVP with the intention that it is NOT the final product. This decision is best left to the customers. In almost all cases, you will have to go back to the drawing board to make necessary changes to the MVP.

#3 Cost to Avoid

To sum up, there are a few startup costs that you should avoid as much as possible. They are:

1. Subscription-based services

There are numerous cheap if not free alternatives available in the market. There is no need for you to subscribe to an expensive service. Use the free ones until you’re sure that you need advanced features that only a paid solution can offer.

2. A huge office

Everyone desires a fancy office. But everything comes at the right time. There is no need for you to purchase or rent a huge workplace. Focus on the success of your business first – your dreamy office can wait until you establish yourself.

3. Expensive Assets

Although new technology seems to be tempting, it doesn’t mean that it will be a useful business expense. Initially, you need to purchase only what you truly need. Also, try to do so as economically as possible.

4. Non-measurable outreach efforts

It doesn’t matter whether it’s public relations, marketing, or branding, if you are unable to measure the results of your efforts, you shouldn’t be spending that money. When you’re on a budget, focus your spending on things that can provide you with a better return on investment.

5. Spending money before you make it

Be cautious of spending money on irrelevant things before you’re making enough to cover it. Just as humans should live within their boundaries, so should your startup.

Thank you all for reading. Would be happy to share more knowledge about these areas based on your comments and DMs.

Note: This is a collection of information from various books, articles, and blogs, and is based on personal experience. I'm not a financial expert