How Much Does It Really Cost To Run A Business?
Are you spending too much or too little in your business? Find out how much it actually costs to run a business and if your costs compare....
Bootstrappers will tell you that you can run a business on a cost comparable to the smell of an oily rag.
Many small business owners will tell you that they don’t need to charge much due to their “really low overheads”.
The truth is, most people simply don’t know what it costs to run their business.
And that’s because they haven’t taken the time to analyse it, which can be really dangerous.
I've been helping people nail their pricing for a long time now, and I can tell you - running a business is likely to cost more than you think!
Especially if you actually want it to grow and be sustainable for you to run.
So, how much does it actually cost to run a successful business?
Let’s find out, shall we?
Why You Need To Know Your Numbers
Knowing the costs in your business is an important part of ensuring you are creating a sustainable and profitable business model.
If your costs are consistently higher than your earnings, then your business is not going to last very long!
But, how much does it REALLY cost to run your own business?
It’s a topic no one really wants to talk about.
We brush it off, saying we have “low overheads” or that we are “bootstrapping” our way through the first few years, or we’re simply “reinvesting everything”.
Unfortunately, even as a solopreneur working from your kitchen bench, running a business ain't cheap!
It's not until you actually sit down and do your numbers (or worse, DON'T do your numbers, but just find there's never any money left in the bank account!) that you discover just HOW expensive it can be.
The problem is, if no one talks about it, how are you supposed to know if you are spending too much? Or not investing enough?
The Actual Costs
OK, it’s time to talk about it now!
You might think that you can get by on “the smell of an oily rag”. But in reality, the costs involved with running a business are more comparable to a silk scarf or some Egyptian cotton!
I can almost guarantee that running a successful business is always going to cost more than you think it is going to.
Ready for it?
Having worked with over 150 solopreneurs and small businesses across NZ, Australia and the US, I can tell you the average running costs for a solopreneur service business can range from $20,000 - $80,000 a year (excluding taxes).
Most sole trader businesses here in NZ live in the $25,000 - $60,000 bracket.
Equivalent solopreneur service business in Australia and the US are much the same, despite the differences in currency.
How long you’ve been in business will also often influence how much your business costs.
But even first year businesses often cost over $20k, especially when you take startup costs into consideration.
And of course, those costs will increase significantly if you have things like stock, retail or office space, staff or contractors to factor in.
Then you’re often looking at running costs in the $200k+ range, depending on your scale.
Did you know it would cost that much?
Most business owners don’t - even when they’ve been in business for years!
And that is where we can come unstuck when trying to create a profitable and sustainable business.
Realistic Business Costs
So, how do your costs stack up against the average New Zealand business?
As I mentioned above, the average New Zealand business will have annual costs in the range of $25,000 to $60,000.
As a general rule of thumb, if your costs are below $20,000 annually, it can be a sign you are UNDER investing in your business.
That means you are not getting the support or resources you need to grow in a healthy way.
Alternatively your costs may be sitting at the upper end of the scale.
Often, this results in you having to work incredibly hard, but still not having much left over in the bank for you.
That can indicate you’re investing in the wrong things - things you no longer use, or that don’t generate a significant return (ie that don’t help you grow your biz and make more money)
Striking the right balance of costs to revenue is what is going to create the kind of business you love, and that pays you what you deserve.
If you don’t know what your costs are, you can’t make smart business decisions.
It can leave you afraid to invest, because you aren’t sure what you can afford, or you invest in a whole lot of stuff that doesn't really move you forward, but keeps your bank account dry.
No matter where you are in your journey, knowing your numbers is a critical part of growing a healthy, profitable business.
What Are Your Business Costs?
The number one rule of business states that your revenue needs to be higher than your costs in order to make a profit.
So, how can you be sure of what your profit is if you don’t have an accurate picture of your costs?
It’s time to remedy that!
Grab a pen and paper (or my tool of choice - a spreadsheet) and start jotting down all the costs you incur in your business.
That is EVERYTHING from the big stuff like utility bills, asset purchases, business coaching or advertising, through to smaller things like the cost of all those monthly software subscriptions or the client coffees you buy.
Once you have a clear understanding of what your costs are, you can then explore whether you are investing your funds in the right place.
This is also one of the first steps to creating a profitable business, that also creates the lifestyle you desire as well.
But it can be hard to know where to start...
Or how to make enough money to pay for all your investments as well as yourself!
That's why I've created Profitable Pricing For Startups.
To take the guesswork out of your pricing, so you can actually afford all those investments and still have plenty of money left over for you!
Just starting out and determined to earn a living from your biz, but with so much to learn you just don't know where to start?
Not a “numbers person” and feel like spreadsheets are a foreign language, but know you need to do SOMETHING?
Guessing at your pricing, just making numbers up and then second-guessing yourself when you send them to the client?