How Much Money Do I Need to Start a Business?

Short Answer: Add three buckets. One-time startup costs: equipment, licenses, insurance deposits, launch marketing. Working capital: the wages, materials and bills you pay before customers pay you. Personal runway: what your household needs from savings until the business can pay you. Most people price only the first bucket, and it's usually the smallest.

Search this question and you'll find averages: a few thousand dollars for a home-based business, far more for a restaurant. Averages don't help, because the number depends on what you're building and how long it takes to pay you. The useful answer is a method you can run on your own plan.

What Are the Three Buckets?

1. One-time startup costs. Everything you buy once to open: equipment, a vehicle, tools, formation and licensing fees, insurance deposits, a website, the first round of marketing. These are the costs people list first, and the easiest to price with a few quotes.

2. Working capital. Working capital is the cash a business needs just to operate between paying for work and getting paid for it. If you pay a crew weekly and customers pay 30 days after the invoice, you carry a month of costs before any money comes back. Growth makes this bucket bigger, not smaller.

3. Personal runway. Your household keeps spending from day one. Until the business earns enough to pay you, the gap comes out of savings. For a founder leaving a job, this is often the largest bucket of the three.

A Worked Example

Before a hypothetical landscaping company, Greenline Landscaping, was a full-time business, its owner worked as a crew lead and ran jobs on weekends with a personal pickup. The weekend business made about $2,500 a month in profit. Going full time meant commercial-grade equipment, a first hire, and a year of living partly on savings.

The startup figures below are illustrative. Real quotes vary widely by region and by whether equipment is bought new or used.

Bucket 1: one-time costs.

Bucket 2: working capital. The first crew member is paid weekly, and materials and fuel are paid as they're used. Commercial clients pay 30 days after the invoice. So the business carries about a month of costs before the first commercial payments arrive:

Bucket 3: personal runway. The household needs $6,000 a month after tax, which takes about $92,000 of pre-tax profit a year, roughly $7,670 a month. The owner projects profit starting at $4,000 a month and reaching that level in about a year. The gap, plus a three-month cushion, comes to about $40,000. (The step-by-step math is in Quitting Your Job.)

The total.

The first bucket, the one most people would call "startup costs", is under a third of the total. An owner who saved $24,000 and quit would run out of money in the first spring, while the business was doing exactly what the plan said.

Where Do People Underestimate?

• Working capital in a business with payment terms. Every customer who pays later adds to the cash you carry. A business that signs its first big commercial client can need more working capital the month after it signs.
• The ramp. The runway bucket depends on how many months it takes to reach your pay target. Doubling the ramp from 12 to 24 months roughly doubles that bucket.
• Seasonality. Greenline earns most of its revenue from April to October. A launch in August faces winter within three months, and a monthly plan shows that where an annual one hides it.
• Costs your employer covered. Health insurance and the retirement match move into the household number the day you leave.

Can Some of It Be Borrowed?

Some, and which bucket decides how. Equipment can often be financed against the equipment itself. Working capital can come from a small business loan or a line of credit. The personal runway is the bucket lenders don't fund, which is why it usually comes from savings. Every loan payment is a fixed cost, so borrowing raises the profit the business needs each month and lengthens the ramp slightly.

What to Look For

• Personal runway as a share of the total. If it's more than half, the plan depends on how fast the business can pay you, and that's the assumption to test hardest.
• Working capital against a month of costs. Less than one month of wages and materials, in a business where customers pay on terms, usually means a scramble in month two.
• A cushion inside the total. A plan that uses every dollar of savings has no room for a slow first season.

What a Finance Consultant Would Do Next

A consultant working with Greenline's owner would test the $74,000 against a slower ramp, look at buying the mower used or financing it to shrink the first bucket, and move the launch date so the first months fall in spring instead of just before winter. They'd also check the cash low point month by month, since that, more than the total, sets the savings needed.

That analysis is what Occam's Model runs with your plan. It works out what your business has to earn to support your household after tax, adds your startup investments, and lays out a 24-month forecast that shows how long your starting cash lasts. When you need extra help, an expert can review it with you.

Common Questions

How much does it cost to start a small business on average?
It ranges from a few thousand dollars for a service business run from home to hundreds of thousands for a restaurant or a shop. Your own number depends on the three buckets above, and the personal runway often outweighs the other two.

Do I need all the money before I start?
You need access to it before you'd run out. Equipment can often be financed, and some owners keep a job while the business builds, which shrinks the runway bucket.

What is working capital in simple terms?
The cash tied up between paying for work and getting paid for it. If customers pay in 30 days and you pay your team weekly, you carry about a month of costs.

How much of a cushion should I add?
Many owners add three to six months of household costs on top of the planned gap. The right size depends on how confident you are in the ramp.