Initial investment cost is defined as the amount of money a business owner needs to start up a business. This money can be raised in a number of ways, one of which is by selling stocks and shares, giving people the opportunity to invest in the business and share in the profit. This is also known as a business startup capital.
The importance of the initial investment on a business cannot be underestimated. According to records, half of all businesses fold up within two years of operation because of lack of capital to keep them running. In the expert’s opinion, you better not start a business if you do not have the basic capital to operate and run the business till it gets to break-even point.
Most investors make mistakes thinking that the initial investment cost is all about what is needed to set up the business only. There is more to running a successful investment than just setting it up. There is need to finance certain business activities during its formative years, until the business is strong enough to fund those activities from cash inflows. All these; setting up the business and financing it after it must have been set up, are all what is regarded as the initial investment cost of a business.
CALCULATING THE INITIAL INVESTMENT COST
Before going into numbers, there is need to understand the role of budget creation in every investment. The budget should be made of expenses, both recurring and onetime expenses. Recurring expenses include payroll, taxes, lease, electricity bills, etc; while non recurring expenses include fees for business licenses and incorporation costs. This may seem like an easy task but in the real sense, potential investors need to know the basics of a business, that way, they have an idea of negligible costs of running the business of interest.
With all of these in mind, note that there are different ways of calculating the initial investment cost of a business, but most people prefer the spreadsheet method. Usually, this method should include sections for initial startup costs, fixes costs, and variable costs. All of these sections give the investor room to put down in details all the expected cash flow activities that are involved in running an investment efficiently and successfully.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.