Let’s cut to the chase
Firstly, there is absolutely no where on planet earth today, above and below it, where you can start and run a business without a significant amount of money. If anybody tells you otherwise; ask them to demonstrate.
Secondly, In addition to finance, there are two other forms of capital that you WILL need to leverage to successfully run your business, these are; Social & Human Capital.
The size of said financial capital will depend on the type of business you want to start and how long it will take you to become profitable.
Now that that is out of the way
Having started and run several failed businesses over the years, one consistent problem I encountered was running out of money or operating capital. I could never figure out what I was doing wrong, after some soul searching I discovered that part of my problem was that I fundamentally believed in bootstrapping, i.e. that it was possible to start and run a business on the barest minimum and so that Is the approach I often took.
Let’s set parameters to this conversation
Don’t get me wrong, it’s not that bootstrapping doesn’t work, it’s just that it needs a specific set of special conditions for it to work. Given that most entrepreneurs fail anyway, even with all the resources they need at their disposal, boot strapping is, in most countries, a very long shot. Boot strapping of course, is different to “No-money”; bootstrapping means making do with the barest minimum and “no money” just means no money.
Here is why it is Impossible to start with out money
Part of the challenge for start up entrepreneurs is winning the confidence of potential customers. Customers want to know that the quality of your products is good, that you are reliable and that you will still be able to service your product a month down the line when they have problems with it. Here at home, in South Africa, there are a bunch of markers that people use to help them figure out whether or not you are trustworthy. Some of these may seem ridiculous, but they matter to people. Here goes: An office and where it is situated (Address), A landline number, Branding, A letter head, A personalized domain name email address, Business cards, Who you have done business with, A website, How you are dressed, the value (price-wise) of the equipment you use in your business, including your phone & laptop, Whether or not you and or your business show up in a Google search And here is the biggest one; whether or not you know what you are doing i.e. Do you have work experience related to your business?
This isn’t an exhaustive list, but these are the basic trust markers, and they do differ across cultures, races & age groups (Believe it or not, even corporates use these same markers as well). However, based on these requirements are alone, you are already out of pocket north of R 10 000.00.
So, after some experimentation, I figured out a formula to help calculate how much starting a business costs . Using average prices, and these may differ slightly from situation to situation, and a general start up entrepreneur profile, starting a one person business will cost you north of a quarter of a Million rands!
Let me demonstrate
To help me illustrate this point effectively, let’s use a character. Let’s name them them Neo, to keep it gender neutral. Neo is a Software developer.
There are three types of financial capital one needs when starting a business; Money to set up the business, money to keep the business operating and Money to buy supplies/materials. Since the cost of materials differs from business to business, we will exclude it from this calculation
Because perception matters…
Neo will need the do the following to set up their business:
Register it with the CIPC (R175.00), Purchase a domain name for their website (R89), get branding (Logos, letter heads etc) for their business developed (R6000.00); Print 500 single sided business cards (R500.00), Pay a deposit (usually double the rental fees) for office space they will be using (R10 000)(assuming they pay R5000.00 in rental fees every month for it), purchase an Office landline number, with an accompanying hand held device, (R500), A 3G modem (R400), well because Wi-Fi coverage is not universal and the all important laptop, a good one will set you back R5000.00.
Total cost of set up: R 22 664.00
Oh, I forgot to mention the website, a good one will set you back R10 000.00, so Neo’s total cost of set-up is:
But of course, the business needs to run
Now that Neo’s business has been set up, they now need to run it, so the costs described below are operational i.e. month to month costs. Since Neo is very sharp, we will assume that they will become profitable after their first year in business, so the calculations that follow are only for the first year of operation. Here goes:
Website domain hosting (R89.00); 1Gig Data (R150.00) because free Wi-Fi isn’t universal, yet, (hopefully soon, fingers crossed), Airtime for the office phone (R500.00) to make those sales calls, Office rental (R5000.00) and the costly and inescapable business bank account, (R140.00 monthly- excluding transaction charges). That brings us to a total cost of…drum roll please…..
With that out of the way, our developer needs to eat and live…
Here is where it gets tricky, the theorists always get it wrong; Neo is a one person business, in order for them to make it work, they need to be a 100% dedicated to it, that means they can’t run their business and hold down a 9 to 5. So, our sharp young sprite needs to find someway to pay their R5000.00 rental fees for their flat, buy their regular R3000.00 worth of groceries, pay for R2000.00 worth of petrol/travel to and from work, including to & from clients and of course they need R3000.00 for general day to day expenses which include buying launch at the office and paying for those coffees with potential clients. Since our young sprite is also mobile, they need to have airtime for their cell phone to call more clients, friends, family & keep their networks going, that will set them back another R500.00 monthly. This brings their total living expenses to a nice young…
R 162 000.00
So ladies and gentlemen, If Neo wants to quite their job and focus on their one person development business full time, Neo needs to have a total of R 162 000.00+ R 70 548.00 +R 32 664.00 =
R 265 212. 00
Generally, most small businesses take between 1-36 months to become profitable, not having enough money to keep you going beyond 6 months is just careless, so you need to start with at least a year’s worth of cash.
You may have noticed that the biggest expense in Neo’s budget is their living expenses, that is not an accident; full time entrepreneurs still need to eat and live before they become profitable, but this expense is also indicative of the fact that the largest cost portion of most businesses is their human resources. So if Neo wanted to get another developer on board, guess what, that bill goes up sharply and if they needed a sales person to sell their software, well, they will have to rob a bank, but that is another conversation for another day.
So in a high level peanut shell ladies and gents, it will cost you, on average, R 265 212.00 to start and run a one person business in South Africa today, excluding the cost of supplies.
So, next time you go looking for start up capital and your funders tell you that you can’t include your salary in the capital requested, do this quick calculation for them and ask if they can live off charitable donations from friends and family for a year & still run a successful business.
Sandiso Ncube is the Founder & MD of Before You Start and the author of The 10 Minute Guide to Starting a Business: Lessons Entrepreneurs Learn the Hard Way