You make a beverage you love and that your friends, family or customers always request. Seeing that product on shelves with your own custom label would be one of the one of the coolest and most rewarding experiences for any entrepreneur.
While the idea of starting your own beverage company might seem like a major undertaking, many of the drinks you see in grocery stores and gourmet markets started with the same things: a good product, a desire to build a business and a solid financial and accounting plan.
If you have the product and the desire, then it’s time to consider what it’s going to take for the financial component. The good news is that very few people finance a business all by themselves, and there are many resources available to a startup company, like cloud-based bookkeeping software, specialty beverage accountancy, and several funding options which we’ll discuss here.
When deciding on the best financial course for your beverage company, consider these factors:
How Much Capital Does It Take to Launch a Beverage Company?
This is likely one of the first questions you’ve wondered about, but it’s less important than you might think. While the average cost of a startup is estimated to be around $30,000, yours could be less or more depending on multiple factors and that number will change as you go along.
More importantly, depending on how you decide to finance your business, this total cost won’t be all on your shoulders. Also, with good accounting, research into your beverage niche and a detailed business plan, you can avoid wasting money which will keep your costs down.
A well-researched business plan will give you a lot of insight into your initial costs and financial goals, along with a plan for how to reach them. It will also contain your break-even analysis, letting you know when your company will become profitable.
What’s your Breakeven Point?
This is where things really start to come together: the point where your expenses and revenue will equal each other and you’re ready to start making profit.
As you go along and costs change, this number will also change but there are ways to get an initial break-even analysis for your business plan. The three main things you’ll need for the analysis are an estimate of your fixed costs, an estimate of sales revenue, and an estimate of how much profit per unit you’ll make.
Can You Support Yourself and the Business Until It’s Profitable?
Good things tend to take time and a beverage startup is no different. As a general rule, businesses often take two to three years before becoming profitable. However, this doesn’t mean you need three years’ worth of living expenses saved up before starting. Instead, make a plan to continue working your current job until you have at least 6 months of expenses saved. If this isn’t an option, consider downsizing your expenses where you can and/or adding these costs to your initial financing efforts.
How Do You Plan to Raise Money?
While the vast majority of entrepreneurs do have to put up some of their own money, it’s also rare to pay 100% of costs out of your own pocket. Instead, you’ll likely rely on a combination of money you and/or partners put in plus one of several fundraising and financing options.
These financing methods fall into one of two categories: debt or equity financing. Debt financing comes in the form of borrowing money and paying interest on it. This includes borrowing from a lending institution, friend or family member. It’s good to note that if you do go the route of personal loans from friends or family members, interest needs to be paid the same way it would be to a bank. This is in order to avoid a gift tax.
Pros and Cons of Debt Financing: While there is more risk with debt financing because you will continue to owe no matter how your business is doing, it has a major advantage in that you get to retain complete control.
Equity financing, on the other hand, is when you pay for the privilege of using money with a stake in your company. While you can offer this to a friend or family member, this is most typically done with the help of an angel investor or venture capitalist supplying a much larger sum of money.
Pros and Cons of Equity Financing: The biggest pro of equity financing is that the investor assumes all the risk. If your company tanks, it’s the investor’s money that goes down with the ship. However, this also means that the investor now controls a portion of your company. With the right investors though, this can actually be a good thing since they will be working to make a profit for themselves and you.
Alternative Financing with Crowdfunding: with the rise of major crowdfunding websites like GoFundMe and KickStarter the landscape of capital raising has become more accessible to all businesses, including ones that would have difficulty securing funds otherwise. No longer relying purely on bank loans and venture capitalists, innovators and inventors now have ways to involve grassroots supporters of their products and company.
Even more enticing, crowdfunding offers several options to pay back investors. Both debt and equity style crowdfunding are options but there are also donation and reward based campaigns to consider.
If, for example, you wanted to create a beverage company that operates as a non-profit giving all proceeds to urban farming initiatives, a crowd donation campaign could be your best friend. Alternatively, your crowd investors could be encouraged to fund you by being promised one of the first cases that rolls off the bottling line in a rewards-based campaign.
Despite the growing popularity of crowdfunding, this doesn’t mean that traditional methods of raising capital are dead or inferior. By most accounts, getting funds from family and friends or securing a small business loan are the next best options next to supplying all your own capital. That is, from a financial standpoint getting money from people you know is a good option. Whether it’s good from a personal standpoint is a whole other issue for another article entirely.
Are You Ready to Take Control of Your Business’s Finances?
So many of the variables here really all boil down to one thing: do you have a plan to manage your business’s finances?
If your skills are concentrated on the product development side of things then this might be a difficult question to answer. Fortunately, cloud-based accounting software makes running the financial side of a business easier than ever.
With Xero software on your side, you’ll reduce human errors, get a full view of all your finances, and be better prepared to know when changes need to be made.
Want to know if Xero is right for your beverage business? Contact us for a 30-minute consultation.