Mar 31, 2018
Some startup costs are evident and some are hidden, this diaspora compels small businesses to evaluate startup costs before starting. Don’t march off a cliff while planning to start a small business. You can avoid the common pitfalls in the path to profits by estimating your startup costs closely. Every business is different, thus, there is no single method in determining one’s budgetary requirements.
However, there are some common costs that almost every small business will need to factor in:
1. Cost of research
Before starting a business in a particular industry, thorough research should be done to determine the consumer consumption, market dynamics, competitor strengths and so on. Such research requires a startup to spend money in employing the processes involved or the market research agencies.
2. Insurance, permit, and license fees
Business licenses and permits are usually required by an operating firm. Health inspections and authorizations also need to be accounted for in your expense forecast sheet.
3. Equipment and basic supplies
Equipment can either be leased or bought, depending on the availability of finances. Leasing is usually a good choice since it allows you to keep cash in hand for unforeseen expenses. However, depending on the terms of the lease and the type of equipment, buying may be a better and more viable option at times. This decision requires a startup to evaluate pros and cons between the two.
4. Cost of advertising and promotion
Marketing your business to attract customers is an indispensable cost affair. This required validation and ROI judgement to spend money on this activity. Expenses need to be spread across lead generation, branding and resource building activities.
5. Cost of raising loans or capital
You can get capital to run your business, either through equity or debt financing. Equity financing involves issuing stocks, which do not suit proprietary concerns. Debt financing in the form of small business loans are usually the norm. However, now the nature of raising capital has changed and this process also demands certain amount of money to be spent on business consultancies. This is another cost element that needs critical evaluation.
6. Compensation for employees
Salaries and benefits for employees will need to be paid on time in order to keep them motivated and happy – an essential condition for your business to flourish. Fixed and variables components need to be outlined much ahead of kickstarting operations.
7. Cost of technological requirements
Though technology is employed to eliminate costs and reduce time involved in running a business, it requires a budget of its own. In today’s world, every business needs a website, certain essential software such as payroll software, and information systems. These essentials need attention and a budget.
Making use of a worksheet to plan and record financing will help you estimate your expenses and help you set up business balances. Here is a table to start with:
Distinction between assets and expenses
In the language of accounting, there is a clear distinction between assets and expenses.
- Expenses refer to money that is paid for things like rent, design services, or legal expenses – they are intangible.
- Expenses do not depreciate over time but reduce your taxable income.
- Once the business has started up, expenses are taken into account in the profit-and-loss table.
- Assets may be tangible things like equipment, land, or furniture. They may also be intangible such as intellectual property, of which the business claims ownership.
- Assets are not deductible against income.
- If the value of the asset decreases over time, it may be depreciated.
- Once the business has begun, assets are accounted for in the balance sheet.
Once the small business startup costs have been accurately estimated, you will find that it provides an insight into how much money you need to borrow and what should be your financial goals.
As an ongoing practice, you should estimate the first 12 months of sales, costs, and expenses.
- Deduct the costs and expenses from each month’s sales.
- You will immediately know whether you need more money.
- You will get an idea of the time you will take to break even.
- Also, you will know the difference in cash that is required – your startup cash amount.
Creating a business plan need not be an overwhelming task, but breaking up number into comprehensible and tangible benchmarks clears the haze for an entrepreneur. Let us discuss more about startup costs @ikevaindia.