According to the SBA, about half of all new small businesses close within five years. Of course, businesses fail for a number of reasons, but allocating start-up funding wisely, keeping operating costs low, and maximizing your tax deductions can make the difference between success and failure down the line.
Here’s an essential checklist for keeping your small or home business start-up costs low:
Understand Your Costs
Can you even afford to start a business? Will you need financing to get you started? How much will you need? Calculating the cost of starting your business will help provide answers.
Start-up costs fall into two buckets, expenses, and assets. Expenses are incurred during the start-up phase and include everything from office supplies to paying a designer to help you build your website. These costs are also tax deductible. You can also throw in the cost of incorporating your business and other associated legal fees (although you can keep these costs down by using an online service like LegalZoom, BizFilings or Harbor Compliance).
Assets are one-time costs, such as buying inventory, vehicles, property, etc. and, unfortunately, don’t typically qualify for a tax deduction, although some can be depreciated.
Take the time to define your expenses and asset costs – for many businesses, especially home-based businesses, and freelancers, these might be quite low. Don’t forget your living expenses too. Create a cash flow statement so you can see when how the flow of cash in and out of your business will impact your cash situation for the next 12 months. Incorporate the results into your business plan and address how these costs will be recouped.
Do You Really Need That?
To help keep your costs low during the start-up phase, look closely at what you intend to invest in, do you really need to make certain purchases before you realize any income? Talk to other small business owners to get a realistic appraisal of necessary investments, cost-effective alternatives, and how to build a picture of true costs.
Don’t Give Up the Day Job Just Yet
One way to ensure you have income coming in to cover your basic cost of living while you start your business is to stay with your day job until your business is starting to show income potential and a solid pipeline of clients. Many freelancers get started this way. If you’re willing to put in the hours, it’s a useful transition strategy for many small business ventures.
Consider Businesses that Require Little Capital
Another way to keep costs low is to choose a business that can be operated with little capital and overhead. For example, could you apply your expertise to consult for a former employer or in your old industry? Could you become a virtual assistant? These businesses do more than just administrative tasks, many offer marketing and sales support too. What about the pet business? It’s a lucrative market and dog walking or sitting services require very little up-front investment!
Other ideas include commercial cleaning services, landscapers, content development, mobile app development, graphic design services, etc.
Work from Home
If you’ve thought about joining the other 14 million small businesses that operate out of the home, it can be a convenient and cost-effective strategy, but did you know that you can also claim the home office tax deduction to offset your taxable income each year?
Use Someone Else’s Space
If you need to collaborate in-person, have employees from the get-go, or just need access to a conference room every once in a while, consider co-working spaces or serviced office space. WeWork provides workspace for start-ups and small businesses in 17 locations across seven U.S. cities. These venues are open to members for a fee and include stunning offices, conference rooms, Internet, event space, game lounges, quiet space for writers and more.
They also provide low-cost health insurance, credit card processing services (at a lower cost than a merchant account), plus a partnership with ZipCar for low-cost transportation.
If you prefer your own personal space, many commercial buildings in busy business districts will rent out a serviced office or executive suite. A serviced office broker can help your find one of these.
Redefine Your Office
Smart tools can lower the costs of operating your business significantly. Cloud-based office productivity solutions such as Google Apps for Business, Skype, DropBox and FreshBooks provide free or low-cost alternatives to traditional desktop software – both in terms of upfront investment and long-term maintenance (upgrades and patches are free and automatic). If you need to accept credit cards, tablet-friendly solutions like Square, Intuit GoPayment, and PayPal Here let you accept credit cards on the go and for low per transaction fee.
Want to build your website, without the need for a web designer? Consider services like SquareSpace.
Cut Staffing Costs
A good rule of thumb is not to hire anyone until you know that you can keep them busy. If you have the budget, consider hiring office interns, virtual assistants or independent contractors to take on very specific tasks. You’ll also avoid paying expensive employee payroll taxes (although be sure you understand the difference between an independent contractor and an employee or you may find the IRS knocking at your door).
Technology can also help you cut staffing costs, many of the tools mentioned above enable remote and virtual work environments so that you can stay connected and collaborate wherever your employees are.
Approach Financing with Caution
If you need an injection of cash to get started, you may find that without active financial statements or income, securing a bank loan won’t be easy. Many start-ups tie up personal assets to secure loans – a risky venture that’s best avoided, if your business fails you may lose your home with it. A popular alternative to traditional forms of financing is to borrow from friends and family. The trick is to treat the deal as you would any kind of request for capital. Have a business plan in place, write up a loan agreement and set-up a regular schedule of repayments.
If you anticipate any cash flow hiccups during your start-up phase avoid dipping into credit cards or running to your bank for a loan by using Fundbox’s small business invoice-clearing services.
Master the Art of Negotiation
Whether you’re bartering (exchanging goods and services with another party) or discussing a contract with a supplier, take advice in mastering the art of negotiation so that you save money now and for the long haul. Look for webinars or take a class. Many small business organizations like SCORE, local Small Business Development Centers, or Women’s Business Centers offer regular training workshops on topics like this.
Maximize your Business Tax Deductions
There are a variety of tax deductions that small businesses can take advantage of to off-set costs such as start-up expenses, operating a home office, travel and entertainment expenses, charitable donations, and many more. Make an appointment with a tax professional to be sure you’re aware of everything you can claim and the correct protocols for doing so. Some costs are only partially deductible others fully, and there are often limits on how much you can claim.
Maximizing your deduction can go a long way to reducing your small business tax liability.
Ready for more?
Apply for funding and find out if you qualify today