Estimating your software startup costs and my personal budget

by alex 5. April 2013 21:27

If I had a super power, it would be data analysis and forecasting.

...I mean, if my current skill set had anything on the level of super powers. I would never wish for that super power.

I'd rather be invisible. Or have telekinesis. Or flying powers.

Anyway.

like running numbers and forecasting costs. Back in 2007 or so when the US has the new home buyers tax credit, it took me 3 months of running numbers and reading up on tax codes before deciding between buying a house and renting. (Side note: I went with renting because it would have taken about 9 years for my unit house to break even with my unit apartment. More on that later, maybe.)

Naturally, I track all of my expenses (my Mint account has almost 5 years of history) and it wasn't terribly difficult to estimate my costs when deciding to start my own business. The scarier part was actually deciding to quit my day job.

Supposing that you want to start your own business, be it a pet shop or a software startup like me, you have to know how the money side of things will work. How much will you spend on your business? How much can you expect to make? How long can you run on savings? How will you provide for your family and any employees you have?

Scary stuff.

Here's how I did it.

Figuring out your personal budget

The first step is to figure out your current personal budget, or your current cost of living. The goal of calculating your personal budget is to know how much it costs to live your current lifestyle per day, month and year. It's actually pretty easy to create. There are two basic steps:

  1. List all the things you spend money on, how much they cost and how often you pay for them.
  2. Do math.

Really and truly, it's that easy.

First, make a list everything you spend money on and group it by how often you pay for it. If you support a family, don't forget about the costs of your spouse and children.

Daily expenses: Food? Cigarettes? Coffee? Road tolls? Gas for your car?

Weekly: A personal allowance? Maybe a weekly parking fee?

Monthly bills. Student loans? Child support? Credit card payments? Any online accounts you pay for monthly? Hulu Plus? Rent or mortgage? Electricity, heat, telephone or cell phone? Cable TV? Internet? Milk deliveries?

Yearly expenses: Car insurance? Many online subscriptions like Amazon Prime are billed yearly - have any of those? Christmas and birthday gifts for friends and family? Taxes? Car inspections and registrations? Car maintenance? Hair cuts?

Then, add a cost for each item, for example electricity: $50 per month.

From here, it's a few math operations to figure out your total personal liability.

  1. Add the costs for each group separately: add all the daily items together, then add all the weekly, then monthly and yearly.
  2. Multiply the sum of daily costs by 30, and write down the result. This is your monthly cost of all daily items.
  3. Multiply the sum of the weekly costs by 5 and write down the result. This is your monthly cost of all weekly items.
  4. Add your result from 2 and 3 to your monthly total and multiply the sum by 12. This is your yearly cost for all daily, weekly and monthly items.
  5. Add your result from 4 to your yearly total. This is your total yearly cost.

Tada! Now you know how much it costs you to live your currently lifestyle for one year. You can take this number and divide by 12 to get your monthly cost of living or by 365 to get your daily cost of living. The interesting thing about the daily cost of living is that this shows you approximately how much you have to earn every day to continue your lifestyle.

The next question would be, "How much money are you making now?" If you're earning less than your cost of living then you are not in happy place (unless you have a lot of money in savings). You need to earn more than your cost of living to afford that lifestyle indefinitely.

Finally, keep in mind that your budget is a tool that allows you to forecast your financial costs into the future, so it is important that your budget accurately reflects what your spending habits are. Maintain your budget by adding items that you forgot about, removing items you don't use anymore, and adjusting the numbers to your actual habits.

Figuring out your business budget

Now that you know how to calculate a budget, determining the business budget should be simple. The only difficult part will be determining what you will need to spend money on.

A few ideas for you:

Office rent, electricity, computers, computer maintenance, insurance, business origination fees, lawyer fees, accountant fees, employee wages, employee benefits, taxes, web space, domain names for your website, web designers, marketing, insurance, accounting, human resources, wholesale product prices, engineering cost of product development, certifications, clearances, insurance.

My head hurts. I recommend you read the internet A LOT. Learn as much as you can about various costs associated with starting a business and decide which ones apply to your situation. Create estimates for how much each expense will cost and figure out your business's budget and add it to your personal budget to determine what you're on the line for exactly.

I can tell you from my own research that as soon as you have employees your costs shoot up and your liability increases. This is the main reason that I've put off having employees - I'm running my business off my personal savings and I can't afford to hire anyone.

My personal and business budget

I'm using this blog to record my personal mistakes and successes in hope that it will help someone someday. To that end, it might be useful to see my own budget and things I have to pay for while running this software business.

I budget $10 a day for food, and $20 weekly for a general purpose allowance (this is how I pay for all of my entertainment).

Monthly: Health Insurance - $130, Rent - $500, Storage Unit - $100, Personal Care (soap, razors and such) - $50, Gas - $40.

Yearly: Car Insurance - $1280, Gifts - $500, Car Registration - $35, Car Inspection - $50, Filing Taxes - $100, Oil Change - $70, Haircuts - $80.

As you can see, I'm very frugal. If it isn't in this list then I don't plan on regularly spending money on it.

So, $10 * 30 days = $300 a month for food + $20 * 5 weeks = $100 a month for allowance, which is a total of $400 a month for food and allowance.

Monthly bills add up to $820 + $400 for food and allowance = $1220 per month or $14,640 a year for food and allowance and monthly bills.

Yearly bills total to $2115 and combining with the previous accounts for a total yearly budget of $16755.

That means, it costs me $16755 a year for me to exist - a place to live, food to eat, and so on. This is a minimum-acceptable life style for me. I could cut out the gifts allowance, but I like giving birthday and Christmas gifts to my family. I could cut out the car, but it gives me flexibility that is worth the cost (try living in rural Pennsylvania without a car).

...I may start shaving my head to cut out the haircut allowance =)

Additionally, there are a surprisingly small number of business expenses:

Monthly: Web hosting - $3.50, Marketing - $100, Dedicated IP Address - $2

Yearly: Domain names - $79.24, SSL Certificate - $27, PO Box - $76.

Everything else is free in one way or another. I have a few free online code repositories, I use a lot of free tools and the Microsoft BizSpark program gives a lot of free software.

The business costs add up to an additional $1448.24, which is pretty small. In hindsight, the PO Box was a waste; I never use it and most forms requiring an address won't accept PO Boxes.

Adding my personal expenses, $16755, to the business expenses, $1448.24, my total cost of living while running the business is $18,203.24 a year, or $48.88 a day.

If I can earn $50 a day after taxes, then I'm sitting pretty.

In the end...

...if you want to run a successful business (one that can reliably feed you and your employees), it is absolutely critical to know how much it costs for you to actually do business. If you can't earn more than that cost, then you're probably not in the right game.

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