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Cutting
Startup Costs
When big initial costs make it hard to start your
business, look further into the figures—they may not be as
scary as they seem
Printed in Business Week
Friday February
10, 2009
By Karen
E. Klein
As a startup wedding
and event photographer, I made a list of all everything I need
to purchase for my business, and it literally scared me. Between
investing in equipment, software, Web site design, and advertising,
my projected income is much less than my necessary expenses for
this company. Photography has been my life's passion, and I really
want to succeed. Is there any advice you can offer me? —M.M.,
Chicago
Fear often stems from
lack of understanding. Delving into the financial details of your
venture should clear up your confusion and give you confidence
to proceed—or perhaps persuade you that your business model
is flawed and needs to be overhauled or scrapped.
You'll need to consider
both your startup expenditures and your operating costs, since
the latter will help determine how quickly you can pay back the
former. There are many ways to save on startup costs, such as
outsourcing some services, bartering for equipment, hiring interns,
and forming strategic alliances with other small firms. "New
entrepreneurs are often overwhelmed with the long list of to-dos
and purchases they think they have to make," says Lucinda
Cross, president of Ultimate VA-Support, an outsourcing firm in
Westchester, N.Y. "Some of those things you could get much
less expensively than you think."
Room for Error
You may not even need to purchase all those items you mentioned.
"Can you rent and use what you need when you need it?"
asks Edward D. Hess, professor at the Darden School of Business
in Charlottesville, Va., and the author of So! You Want To Start
A Business. "Can you share? Can you bootstrap?"
Then pencil in your
expected monthly operating costs. Determine how many photography
gigs you'll need to do each month to cover your operating costs
and eventually turn a profit (which you can use to pay back any
money you borrowed to get going). Keep in mind that you'll probably
need several months of advertising, networking, and word-of-mouth
referrals before you're routinely winning assignments. That's
why you want to make sure you've got enough in personal savings
or contributions from third parties (such as family or friends)
to survive 12 to 18 months before you can count on steady business,
says Taylor Smith, managing partner of The Spirus Group, a New
York consulting firm that works with startups. "There is
always uncertainty in how long it will take to grow the business
and how much it will cost, so you should make sure to give yourself
room for error," he says.
As you're preparing
your calculations, you may determine that you'll need only a handful
of sales each month to cover expenses, which should be reassuring.
On the other hand, if it turns out that you'd have to photograph
dozens of events each month before your business becomes profitable
and you start to make a dent in your startup costs, you'll know
that your business model is fundamentally flawed or that—at
the very least—you must change your pricing strategy, says
Smith.
Finally, consider starting
the business on the side while keeping your current job. That
might mean you'll be postponing profitability, but it's often
the prudent course for first-time entrepreneurs. "In today's
deep recession, you need to find a way to test your business idea
without taking a lot of risk," Hess says. "Be cautious,
do your homework, and do not bet the ranch in this economic climate."
Karen E.
Klein is a Los Angeles-based writer who covers entrepreneurship
and small-business issues.
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