Estimating the Costs of Starting A Business

 

If you have effectively analyzed your target markets, put into place an attention-getting promotional plan and learned how to demonstrate the benefits of dealing with your company, you will start to receive money in return for providing satisfaction.

When people see that you keep your promises, they will develop a loyalty to you and your business that will result in repeat sales. But a word of warning: Earning money by selling to someone is only theoretical until you actually collect it! There are a million reasons why someone can delay paying you. And if you are not careful, you can lose control of where the money goes once it does arrive on your desk.

An effective financial management system for your small business has five parts: Estimating costs and living by a budget; making frequent projections of profit and cash; developing a reliable collection technique and expense control program; maintaining a dependable accounting system; and managing your tax situation.

There are many more people with good ideas than there are people who also demonstrate discipline in handling their business's money. Some say that one of the main reasons businesses fail is lack of money. We believe it is lack of control of money.

Don't feel overwhelmed if managing money isn't your strong point -- there are many convenient ways to learn how, including seminars at local colleges and Small Business Development Centers, do-it-yourself books, computer programs and government tax classes, just to mention a few. In a few hours a week you can create a sound system for managing your money.

Let's take a look at the first step in setting up a reliable financial management system: financial estimates.

Checking Your Personal Financial Situation

Not starting with enough cash, known technically as being "undercapitalized," is probably second only to not researching your business concept as a major cause of small business failure. This situation is usually the result of inadequate planning during the pre launch phase.

First you must estimate what your family expenses are and plan how you will ensure that your business income is sufficient to pay them. You should sit down with your family and honestly discuss the minimum amount of money the household must have each month in order to provide security. Ask each family member to offer one or two areas where some expense can be reduced.

In addition to knowing your living costs, you must also be brutally honest about your current debt situation. During the 1980s, many families took on increased debt just to get by. If your family is one of these, you should be realistic about your ability to take on more financial responsibility. New businesses almost always require more money to keep them running than their founders estimate. Remember: Every dollar you must pay each month for credit card payments is a dollar not available to invest in marketing your new company.

"The Business Burden"

When you look at your monthly family income, you should consider what will happen if you quit your job to pursue your business full-time. Your expenses will not decrease much, but your income certainly will. The difference between the family expenses and the family income other than yours can be called "the business burden." What this means is that unless you want your family's lifestyle to change dramatically, you must produce enough revenue from the business to cover the shortfall between expenses and the other household income. Every month that you do not produce enough sales to cover this amount, you must borrow to keep the family going.

Estimating Business Start-up Costs

In addition to providing enough money to pay your family living expenses for two to three months, you will need money to pay for a variety of one time expenditures necessary to set up your business. Let's look at typical expense categories required in setting up a new business:

Office Space

As locating one's business at home becomes more acceptable, larger numbers of new businesses are able to save a major start-up expense -- rent. Renting an outside office, retail store or warehouse space results in some significant startup expenses.

Rent deposits, usually one full month's rent, which can range from $300 to over $1000. Utility deposits, averaging $100 per utility. Insurance, costing from $500 to $2000 per year -- retail stores must often have plate glass insurance in addition to general business insurance.

If you sign a multi-year lease, you can sometimes negotiate with your landlord to have this included in your base rent. This expense may run from $100 (if you do the painting yourself) to several thousand (if you must build walls and add doors and windows).

Furnishings are needed whether you locate your office at home or in outside space. Most offices will require a desk, chair, lamp, file cabinet and a bookcase or bookshelves, at a minimum. You may also wish to have a separate computer table or work station. If you give yourself several months to search, you can often find used furnishings at house sales, bankruptcy auctions and furniture resellers. With cleaning and a little touch-up paint, used furniture can work quite well. You'd better plan for $100 to $600 for basic furnishings.

Computers

Take your pick! An astonishing variety is available today. You will need to do some homework -- learn what the most commonly used computer terms mean and how particular features affect speed or use (there are plenty of magazines and books available to help with this). Then visit both computer and discount electronics stores to compare. Don't forget such catalog sellers as Dell and Gateway, both of which make excellent computers. A word of caution: It is probably not smart for a new small business computer user to buy a used computer.

Copiers

Do you need one? If running down to Kinko's every other day or so takes too many hours of your time, you do. In a pinch, you can make copies on your fax. For a new small business, inexpensive (around $1,000) tabletop copiers are available at discount office supply stores; those manufactured by Sharp are fairly reliable. The more bells and whistles a copier offers, the greater its tendency to break down. However, if you feel you need a high-speed, multi-featured model, rebuilt copiers can be bought for under $2,000.

Inventory

Retail stores require stock before they can open for business. Often the initial stock to fill a 500-square-foot store (25' X 20') costs over $20,000. Obviously the nature of your intended stock will determine the exact cost.

Manufacturers are well-advised to have a supply of raw materials on hand when they start so that they can keep up with orders. Industrial supply and material suppliers often insist on selling in minimum quantities that are larger than you need in the beginning but which you must buy in order to get any materials at all. This often results in significant costs to you.

Telecommunications

At a minimum your business will require one telephone line and a telephone to attach to it. You may be able to get by for some time with your existing residential phone line, which will enable you to avoid a connect charge. However, if one line is not enough to handle all calls or if you need a second line to transmit and receive faxes, it will cost you a minimum of $80 to connect the line. Any inside installation is extra. Local phone companies bill their inside installation time at around $60 per hour.

Consider also your needs for phone message handling, calls made outside your office and paging. An answering machine may be sufficient to handle calls when you are out. But perhaps you feel your customers demand a live person to answer your phone. Hiring a receptionist or live answering service will increase your start-up costs substantially. Special phone features, such as call waiting, call forwarding or caller ID carry installation charges of $30 to $40 apiece. However, from time to time the telephone company may offer specials that combine such features at a single, lower cost.Phones can be found in discount stores and catalogs as well as direct from the phone companies. Plan on spending $40 for a reliable one-line phone and $60 for a good two-line phone. A telephone is no longer enough. Your customers expect to be able to send you something immediately by fax. Coated paper faxes run about $225; plain paper faxes cost around $500.

Cellular phones often run over $100 to install and set up,and pagers often require a $200 deposit. These costs should be figured into your start-up cost estimates.

Licenses, Fees and Permits

Common start-up costs in this category include assumed name registration fees ranging from $30 to $50; incorporation fees of $100 and up; business licenses starting at $30; health permits sometimes costing several hundred dollars and specialized state-issued licenses such as cosmetology licenses, which can cost up to $1,000 a year.

Insurance

If you are starting a typical home-based service business, your renter's or homeowner's insurance may cover your business equipment, supplies and inventory. But it may not -- be cautious and check your policy coverage with your household insurance agent before you open for business. Often a small additional fee -- perhaps $50 or so -- will purchase a rider for your policy that will cover such equipment as your computer, telephone and fax machine.


Professional Fees

If you are considering incorporating your business, need contract forms set up, will deal with importing and exporting, want to set up distributors or require any other legal guidance, you should budget from five to seven hours of an attorney's time. Good business attorneys charge between $95 and $125 an hour, which means you'll need to set aside $500 to $1,000 in start-up investment for legal help.

If you are planning to open a retail store, a wholesale company or a manufacturing firm, you would be wise to consult an accountant before you launch. The accounting systems needed to support these types of businesses can be complicated, and you can't expect to understand all the details without some help. Budget $500 to $1,000 as a start-up investment in accountant's fees.

Summing It Up

When you total all the categories of start-up expense, you may be amazed at the total. If you include the purchase of a computer, start-up costs can easily exceed $7,000 -- without any cash contribution toward your personal living expenses. Advance planning is the key, because you should try to avoid borrowing money for start-up costs. You will need to borrow later to stay in business. Borrowing before you start puts you in a deep credit hole before you have even begun to market your company.

This article was used with permission from:

Go Smart Training 415 E. Golf Road, Suite 110Arlington Heights, IL 60005
Toll Free: 1-800-593-5305 | Fax: 1-847-593-530

Pape Financial Services, Inc.
9729 W. Grand Ave ~ Franklin Park, IL 60131~USA

Tel: 847.455-9500~Fax: 847.455.9501

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Last modified: April 15, 2003