One of the questions that I am most commonly asked by people who are thinking of starting a product business is how much it all costs.
It’s a reasonable question - after all, knowledge is power and going into business with your eyes wide open is a great idea.
The trouble I was having was that getting decent information on this subject was really difficult.
We are all bombarded on a regular basis by FB ads promising to show us how to build a 7 figure business in a fortnight, but decent, actual data from small product businesses was not easy to find.
There was only one thing to be done - I had to find out for myself!
I put together a questionnaire and over 50 small businesses answered it. In this blog post, I’m going to run through who answered, how much they spent, what they spent it on and what factors influence the cost of starting a product business.
The make-up of the businesses that answered are below:
What was the result?
The breakdown of the amount that these businesses spent in their first year of business was:
So the majority (62%) of businesses started their business with less than £10k of expenses although a significant number were spending considerably more than that.
What were they spending their money on?
Other big investments included a trade show and the cost of branding.
What affected that number?
The cost of running a business definitely shifts with the type of product and the method of production. Looking at the data in more depth shows some interesting results.
Clothing costs more
Handmade businesses cost less to set up
Manufacturing is hard to get into for less than £10k
Physical stores cost more
What does this mean for you?
If you are thinking of starting a product based business, then you probably want to just know that answer to the question that I get asked all the time - how much will it cost for me?
Based on the answers that I received from my survey, a reasonable expectation would be -
A handmade brand would spend under £5k in their first year (excluding the cost of their time and labour).
A clothing brand would expect to spend £10-£20k but £20-£50k is also quite common.
A physical store would expect to be spending around £10-£20k also.
Home tends to be less expensive than clothing, with £5-10k being the band that the majority of these brands spent.
OK, so that’s how much it costs to set up, but when will I see the money?
53% of businesses are forecasting or were profitable by the 2 year mark, with 12% achieving that in under a year.
So expect spend up to the first two years of your business operating at a loss - making a profit more quickly than that means you are doing well!
And when will I be able to pay myself?
63% of product business owners are not taking a salary from the business.
In other words, of the businesses surveyed, two-thirds were not currently paying themselves.
Of those who were under a year, not a single business was paying themselves a salary.
Even in the 2 - 5 year bracket, 60% were not paying themselves.
In the 5 years plus, nearly all businesses were able to pay themselves a salary - 40% were in the £1-£2k per month category and 13% paid themselves £2-£5k.
Be prepared that getting to a point where you can take money out of the business may take time.
Not sure if you can wait that long? Profit First by Mike Michalowicz is definitely worth a read for all aspiring product entrepreneurs.
Tips to manage your finances
Now you have an idea of how much it is going to cost you to get started, here are some tips to maximise your chances of success.
Want more information about the cost of starting a business?
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