Ines Lopez

Probably more than you have calculated. Sorry to disappoint. Even if you are starting a consultancy firm you probably should budget for a few months of no income so your initial investment can cover you while your clients start flowing to you.

This article has a decent list of potential costs for different types of businesses. What I want to cover here are costs that I feel people should make more emphasis on but somehow seemed watered down in all the excitement of starting a new venture. These thoughts are going to be more relevant to you if you are starting a business that entails construction of some sort.

I am sure the following is something that start-up accelerators and business coaches tell to any aspiring entrepreneur.

” Your initial investment should cover your design, construction and at least 2 years of operational costs”. This is something we used in my public office job when we were budgeting for civil engineering projects. We would look at design, construction and a few years of operation and maintenance costs to determine the total cost of the project. Now rephrase that for any type of business more or less, what you have to account is about at least 2-3 years of no revenue while you are having all the expenditure. In construction these numbers are higher since the asset has a longer life.

I client I consulted for recently approached me telling me they had invested all their patrimony into setting up their business in the tourism industry. They put all the effort, money and energy into getting it open and now they were in desperate need of profits starting to showing up. They had been less than 1.5 years open and already in severe financial pain. All I could think about is what type of planning and management had they implemented because it seemed to me that despite having loads of money to make a huge investment they haven’t done it very wisely.

There could be several reasons for the situation they were finding themselves into:

• The owners thought all they needed was building the place and do marketing and that afterwards it would start creating traction and bring revenue. That once they were open the revenue will flood in and their need for investment would be minimal. This is something very common nowadays. I understand being positive about your business idea, but there is positivity and there is nativity when it comes to business. Unfortunately setting up your idea into the real world (meaning building your business or product and being able to put it into the market) is just part of the first stage of your business life-cycle, not the end of it. The first stage of your business doesn’t end until you can balance your income and your expenses, and you probably should account for the initial expense as a total loss or maybe prorate it through several years of your business until you can come afloat from it. That common saying of two years is there for something. And if you have managed to recuperate all your investment before than 2 years, congrats on your awesome business idea. I hope you are teaching people how to do it, cause you are a pro!
• The initial requirements were not clear enough and the design had to keep changing to accommodate more things that were asked last minute. Poor requirement definition is a key issue in project or business initiation and can cause a lot of extra work and cost during the design phase, eating up part of your investment. If you want to avoid that make sure you talk to experts on your industry during the initial stages to try to identify every possible aspect that should be cater for from the beginning. That would be much cheaper than having to add things on the go.
• A critical factor that I think happened to this client in question: The operations and maintenance aspect of the business were not introduced as part of the design process or costed up as part of the initial investment required. For example the structures built for the business were done from a particular material that though very aesthetically pleasing, was very expensive to maintain or repair. Add to that, spending all your investment capital in the design process and you have a perfect recipe for your business going bankrupt before it becomes a toddler. The terrible “2” get a new meaning on this one.
• The investment could be maxed up because the providers were not delivering up to expectations, creating additional costs to fix poor performance issues during the early stages of operation. This is always going to be a risk when outsourcing is involved. How to minimise it? Tight requirements, sensible oversight of construction and a sensible procurement process for your contractors. Don’t allow yourself to go chasing the cheapest offer. Always have trigger mechanisms based on performance and durability of the service you are getting in your contract. Keep in mind that cheap sometimes costs you more in the long run.

So how much should you have put aside to start your business? I will do a list of key items to be able to form an initial budget. There may be more things but these are paramount based on my experience advising clients:

• Find a reputable expert in your industry of choice. You will ask them about design, build/construction, operation and maintenance for your business idea. Do a Non Disclosure Agreement if you want to protect your intellectual property. Don’t let the fear of someone getting your idea set everything in the dark. If you had this idea you can have more, but maybe you are not able to find all the capital you now have at your disposal. Get all the info you can from the expert, even better appoint them as advisor during your process. You don’t know what you don’t know and those don’t knows are likely going to cost you money. An expert is the best solution to mitigate this. And if you are an expert in your future industry, it wouldn’t be a bad idea getting a second opinion to confirm your feels, it may sound redundant but it can make all the difference.
• Make sure you have a constant flow of communication between operations, maintenance and design during the design phase of the project. Don’t design just with the eyes or the wants, design with sustainability and functionality in mind, for you, your clients and your employees. Your budget will thank you for it. And your employees will cheer you on if you are doing their job sensible to do. It will help you have lower employee turnaround amongst other great internal benefits.
• Account for the initial investment from design and setting up and assume 2 or 3 years of operational and maintenance costs without any revenue coming in. Don’t assume the income coming in will be able to cover your running costs. Otherwise you may feel out of budget pretty quickly.
• Make sure your procurement process is fair but demanding. Have clear deadlines, requirements and quality standards to ensure your providers are forced to meet what you are paying them to do, even if that means that they have to come back in to fix things. Introduce guarantee periods in your contracts and never allow a contractor to get their full payment without giving you all the paperwork and relevant documentation about their work. Sounds silly but you wouldn’t believe how difficult is going to be for a new contractor to pick up things if documentation is not available and they have to figure out what the other contractor had been doing . And you will no doubt pay for it. And no, not every contractor is going to produce papers even if it says so in the contract. Many will try to get away with sending you some low quality documentation. Have checks in your contract indicating that the documentation will be reviewed by you at least once before it is accepted. That way at least you can get one round of feedback and improvements in.

If you can’t afford the number that comes up start thinking about offering less functionality first and build up your offer over time, as your customer base gets established.

Rome wasn’t built in a day, same goes to your business. If you are in the hotel industry for example, start with a smaller building, or with less rooms.

Think about doing a deployment plan or an action plan to break down your vision into smaller steps. That can be a great tool to organise your idea, your mind and also communicate to your partners the path you are embarking into.

Don’t let your big vision or the savings of purchasing in bulk distract you from doing a sensible approach to start your business. You may be saving money in the long run even if you have to buy things a bit more expensive at first.

Keep your vision alive while making sensible steps to protect your investment and your idea. It is better to take a little longer to get what you want than getting burned out on the starting of the journey.