Calculating Financial Requirements
How much money will you need to build a profitable consulting service? To estimate start-up costs, you will need to make your best guess of how much it will cost to set up your office for the day you open the front door to your first client. This includes the cost of preparing and equipping your office, getting required licenses and professional memberships, getting the phone hooked up, and funding your initial advertising.
Estimating Operating Costs
Estimating operating costs can be more difficult because it requires that you estimate your living expenses. Most people who have been employees spend as much as they make; they're not sure exactly what they need to live on. However, by starting with your current net (after taxes) salary, you can roughly calculate whether you require more or less to live on. If you operate your business as a sole proprietor, your income taxes and self-employment (social security) tax will be paid by the business.
Other operating costs are those expenses that you will pay each month to keep the doors open (fixed or overhead expenses) as well as those that increase as sales increase (variable expenses). Business start-up experts suggest that a new consultant should calculate start-up requirements as:
one year of living expenses
10 percent contingency
six months of office expenses
From this, the new consultant can deduct:
cash and securities on hand
contracted but unbilled business
credit line access
For example, if you need $60,000 to live on for the next year, add $6,000 as contingency. If office expenses are estimated at $2,000 a month, add in $12,000 to cover the first six months. If $4,000 is needed for a computer and office furniture, the initial capital requirements are $82,000. If you have $20,000 in cash, $5,000 in money owed to you, and $30,000 in consulting contracts, you still need $27,000. A credit line of at least $27,000 or a loan for the same amount will theoretically give you sufficient money to start and operate your consulting business through the first year.
Finding Start-up Money
Where can you get the money you need to start your business? A survey of small businesses found that 73 percent were funded by the owners and their families, 13 percent by outside investors, 8 percent by banks, and 6 percent by alliances with other businesses. However, the survey reported that the businesses that were owner-financed had the highest failure rate.
Where can I get the money to start my consulting service?
In addition to self-funding, outside investors, banks, and alliances, many fund their business by earning a large consulting contract. Their business grows around a primary client for whom they offer reduced rates for a long-term contract. With timely billing, they can meet expenses and build a reputation that will earn additional clients and success.