Cost your first months, honestly
Budget for the months before sales cover costs, and work out how many sales a month it takes to break even.
6 min read
Most first budgets cover the opening and forget the running. The shop is fitted, the stock is bought, the board is up — and then the second month's rent arrives before enough customers have. This lesson is how to cost the first months honestly, so the money lasts until the business pays for itself.
Two kinds of cost
Starting costs are paid once: deposits, fittings, equipment, the first stock, registrations, the signboard.
Running costs come back every month whether you sell or not: rent, salaries, electricity, internet, phone, loan payments, and the money you need to live on.
People budget carefully for the first and guess at the second. The second is the one that closes businesses.
Write the running costs down, all of them
Make one list of everything you will pay every month. Then go through it again and add what you missed. The usual misses:
- Your own living expenses. If the business is your only income, it has to pay you, or your savings do.
- Electricity and water at commercial rates, which are often higher than at home.
- Wastage — food that spoils, stock that does not sell, materials spoiled in making.
- Transport and delivery.
- Payment charges, packaging, and small repairs.
- An accountant, at least for the tax year's filings.
How many months to plan for
Assume sales start slowly. Plan for at least three months, and better six, in which sales do not cover running costs. The money for those months is part of the starting cost, not a separate worry.
An example, with made-up numbers. Starting costs ₹2,00,000. Running costs ₹40,000 a month. You expect to earn back ₹10,000 of that in month one, ₹20,000 in month two and ₹30,000 in month three. The shortfall over three months is ₹30,000 + ₹20,000 + ₹10,000 = ₹60,000. The real starting budget is ₹2,60,000 — not ₹2,00,000.
The break-even number
From the earlier lesson: what is left from each sale after the cost of that sale is what pays the running costs. Divide one by the other:
monthly running costs ÷ what is left per sale = sales a month to break even
If that number is more than you can believe you will sell, change something before you start: a lower rent, a higher price, fewer staff at first, or a smaller version of the idea.
Spend last on what customers do not see
Customers care about the product, the price and the service. They rarely care about the furniture. Spend first on what makes the product good, and last on what makes the place look good — you can upgrade it from your profits.
Do not borrow to cover running costs you have not tested. A loan for equipment that will earn is different from a loan that pays rent while you hope sales arrive.
The tool below runs a full check on an idea in your city: market size, who buys, what competitors charge, and whether the numbers per sale hold.