In my article “Business Plan. . . from soup to nuts,” I provided a basic Business Plan outline or simply put a “go-by” for developing your plan. Within that outline, there was a financial section that’s comprised of a cash flow statement, balance sheet, break-even analysis and income statement, also known as a profit and loss (P&L) statement. These essential documents are your financial roadmaps to managing and operating a profitable business. When seeking funding for your business, you’ll be required to provide them.
However, before you can complete your financial statements, it’s necessary that you have an accurate estimate of your business start-up costs. These costs will assist you in estimating the future financial performance of your business. According to the Internal Revenue Service, start-up costs are: “The expenses you incur before you actually begin business operations. Your business start-up costs will depend on the type of business you are starting.” I know, I know, the IRS, “you can’t live with it; can’t live without it.”
Six major start-up costs categories:
• Cost of sales: Product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping insurance, warehousing
• Professional fees: Setting-up a business structure (e.g. LLC, corporation), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, attorney fees for ongoing consultation, choosing and retaining an accountant.
• Technology costs: Computer hardware, computer software, printers, cell phones, PDAs, website development and maintenance, high-speed internet access, servers, security measures, IT consulting
• Administrative costs: Various types of business insurance, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs, filing cabinets – anything else you need to have on a daily basis to operate a business
• Sales and marketing costs: Printing of stationery, marketing materials, advertising, public relations, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, travel and entertainment for client meetings, mailing or lead lists
• Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation
Some businesses can be started on a shoestring budget, while others may require considerable investment in inventory and/or equipment. Some of your expenses will be one-time costs
such as your business incorporating fee or the price of your signage; while others will be ongoing, such as utilities, inventory, insurance, etc.
Realistic start-up costs should only include those things that are critical to start your business. These expenses are divided into: fixed expenses (or overhead) and variable expenses (those related to producing sales). Your fixed expenses include monthly rent, utilities, administrative costs, insurance costs, etc. Your variable expenses include inventory, shipping and packaging costs, sales commissions, other costs associated with the direct sale of your product or service.
There are several Internet resources to calculate your start-up costs on a worksheet or by using a business start-up costs calculator that lists all the various categories of costs (both one-time and ongoing.)
Many business consultants and accountants (affectionately know as bean-counters) advise start-up entrepreneurs to calculate how much money they’ll need to operate their business for six months. From my experience, a year of estimated operating expenses is more realistic.
Here’s an example of a simple six-month calculation to start a fictitious business, Moms’ Just Like Home Creamery (Hmmmmm, maybe I should start this business):
• Initial expenses: $32,000
• Ongoing monthly expenses: $7,000
• Multiply the monthly expenses by six months: $42,000.
• Add six-month expenses ($42,000) to initial expenses ($32,000).
• Moms’ needs $74,000 to start her business.
See, that wasn't so hard to calculate.
And finally, go crunch your numbers!
List of Resources
US Small Business AdministrationGlossary of Business Terms
Additional Business Term Glossary
US Small Business Administration (small business size standards)
Costs of Starting an Online Retail Business
Costs to Start a Music Business
How to write off your startup costs (Source: Microsoft Small Business Center)
Basic Calculator – online; meets basic calculator needs anywhere you have internet.
FREE 2009 Finance software (Source: PCmag.com)
Next article: “Small business financials – cash flow, balance sheet, break-even analysis and income statement, also known as profit and loss (P&L) statement.”