- Figure out how much money it will cost to run your business
- Estimate how much profit you’ll earn over 5 years
These are the activities for this lesson:
GETTING STARTED
When you’re first starting out your business, you might think – we need some money to get started!
You might need to buy computers, hire people, or rent an office space. All of this costs money, and you aren’t making money from your business yet. So how do you get this money?
Money to help a business get started is called startup capital.
You might need some investors to help you.
Investors are people who loan you money to help you get your business started, expecting to either
- get their money back plus more
- or receive something else in exchange.
While you don’t need to have startup capital, you can include it in your financial plan if you choose.
Check out the information on startup capital in the Additional Resources section.
ONGOING BUSINESS EXPENSES
Think about how much money it is going to cost to run your business. The expenses you pay to keep your business running are called operating costs. Here are some examples of operating costs:
- office spaces, computers, internet
- employee salaries
- app or online store fees
- marketing and advertising
EXPENSE CATEGORIES
Here are some categories that most operating costs will fall into.
You might need to do research to figure out how much different items cost!
Click on each category to learn more.
This includes things like computers, desks and chairs.
Ask yourself:
- What items do we need in a space for staff to do work?
- Will they need computer hardware?
Programs that help you design the product, manage data, or do other things your team can’t do on your own.
Ask yourself:
- Do we have to pay for use of different databases or other services to run our app?
This will include putting your app in the Google Play or Apple App Store.
Ask yourself:
- How much does it cost to put our app in the Google Play or Apple App Store?
- What about selling our app through an online shop?
Advertising in newspapers, printing fliers, using social media, etc.
Ask yourself:
- What marketing strategy did we choose?
- What will it cost?
You might hire people to help you build and get your app to your target market.
Ask yourself:
- Who will we hire?
- How much will we pay them?
This includes rent, electricity, internet costs, and phones.
Ask yourself:
Do we need an office?
How much is it to rent?
How much does internet cost in our area?
COST EXAMPLE
For each expense, you will need to calculate costs. Here is an example to calculate the cost of paying employees in your business.
PLAN FOR THE FUTURE
Your operating costs are likely to go up over time. Revisit your revenue model from Unit 6, and look for things that might also make your operating costs go up.
For instance, if you decided to build more features, you might need to also hire more people to build them.
Also, if you decide to advertise your product more, you need to spend more money on marketing.
On the other hand, you want to cut costs where you can.
For example, you might be able to work from your home, or find some free office space. Look for ways to save money, especially as you are starting out.
CALCULATE PROFIT
After you calculate your operating costs, you can calculate a profit projection, or an estimate of your business’ profit over 5 years.
It’s a simple equation!
Profit = Revenue – Operating Costs
What about nonprofits?
Nonprofits can still have revenue streams, but they can’t keep any of the left over money.
Typically they will use this money to:
- make their business better
- e.g. pay their own workers more
- or do more social good
- e.g. provide more of their services to the community
If your business has the potential to make a lot of money, but you still want to have a social mission, try making your business a social enterprise instead.
ACTIVITY: CALCULATE OPERATING COSTS
Continue the Business Finances worksheet from Unit 6
- Review the Revenue model from Units 6 to help determine your costs each year.
- Fill out the Operating Costs section.
- Calculate profit: Profit = Revenue – Operating Cost
NOTE: It’s okay if you have a negative profit in the first 2 to 3 years that you are in business.
However, over time you want your profit to go up. If you are still in the negative by year 3, you should review your revenue model and/or your operating costs.
Maybe you are not getting enough people to use your product quickly, or maybe your operating costs are too high.
REFLECTION
Here are a few questions to keep pondering about your business finances:
REVIEW OF KEY TERMS
- Operating Cost – the money you need to spend to run your business.
- Profit Projection – how much profit you think your business will earn over many year
- Investors – people who give you money to start your business and in return, get some of the profit you earn
- Startup Capital – the initial amount of money that helps you start your business, typically given through different types of investors
ADDITIONAL RESOURCES
Startup Capital
Many businesses get startup capital by asking people to loan it to them. These people are known as investors.
Once you get your business started, investors expect to either get their money back plus more, or receive something else in exchange.
Here are a couple of different ways to get people to invest in, or put their money into your business. Hover over each card to learn more.
Crowdfunding
Crowdfunding
Examples: Indiegogo, Kickstarter, Kiva, Go Fund Me
Investors
Investors
Examples: Peter Cowley, Jeff Bezos, Paul Buchheit
Venture Capital
Venture Capital
Examples: 3i, Khosla Ventures, SV Angel
