Business Incorporation 101: Estimating Cost and Profit

For anyone considering starting or buying a business, incorporation (or forming an LLC) can keep you safe from many liabilities, however, underestimating costs or overestimating profits are much more likely to cause your business to fail. This means it is vital for you to take as much time as is needed to consider what must be included in your costs and to carefully (and honestly) review what will be your profit.

There is ample evidence that as much as 90% of businesses fail within the first five years. This number is staggering. It is scary. It may even cause you to question starting a business, and it should. The number one reason for a new business to fail has nothing to do with how good an idea it is or how talented the individual is who may be starting it. The number one reason is underestimating costs and not being prepared for how long it will be for the company to make money. We’ve all heard about the latest .com millionaire who launched his business and immediately had thousands of ‘hits’  and Time Magazine is calling him the next big thing, but the truth is that for every story like this there are thousands or maybe millions of businesses that struggle along for years before they begin to realize success.

Fortunately, there are tools available to help you with this task. Here is a list of some of the more commonly helpful calculators that we have found:

Business Start Up Cost Calculator: http://www.businessknowhow.com/startup/startup.htm

Cash Flow Calculator: http://www.bplans.com/business_calculators/cash_flow_calculator.cfm

Break Even Calculator: http://www.entrepreneur.com/calculators/breakeven.html

Earlier, I said that as much as 90% of new businesses fail within the first 5 years. If you are looking into starting your own business, there is a strong clue in that statement. You should be prepared to the odds, meaning that if you are prepared to weather the storm of the first 5 years, you chance of success goes way up. The largest majority of these failures happen within the first 3 years, so it might stand to reason that if you can’t survive without a paycheck for three years or if your funding source isn’t strong enough to last that long, you may want to consider another option. Too many businesses are started with the owner looking for profitability in months rather than years and the odds are stacked heavily against them.

Also, don’t forget…if you get through this part of the planning, don’t forget that this is only step one. Choosing a business incorporation strategy is step two and shouldn’t be overlooked.

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