If you consider yourself to be an aspiring entrepreneur, then you should also add another title: amateur accountant. One of the first steps of new business creation and start-up is to figure out how much money it will take to turn your idea into an actual, operating business entity.
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The Small Business Start-up Budget
When it comes to calculating your start-up costs, there are three main goals to keep in mind:
1. You need to figure out the costs associated with getting your business up and runnin
2. It will help you to be aware of any need for additional financing
3. You need to also be in touch with your living expenses and debt obligations while you are going about building your business. Don’t forget about this! It may take a while before your new business will be generating an income, and there is always the possibility that it won’t be successful. These days, especially, you need to have a plan in place to ensure that during the start-up phase you are still eating and paying your bills
Here are two forms for download to give you an idea of what a start-up budget will look like:
- Startup Cost Estimate Template- Use this template to approximate the amount of money you will need to get a business up and running
- Startup Costs Budget Worksheet- This start-up cost budget worksheet will help you to estimate the amount of money needed to start a new business and run it for the first 3 months to a year
In general, start-up business budgets generally contain the following expense categories: product research and development (R&D), facilities, equipment, start-up inventory, and advertising and marketing, as well as an estimate of your upcoming fixed and variable expenses. You should also try to include your expected income for that first year of operation.
Though many of these expenses are pretty straightforward, several key costs are often overlooked by new entrepreneurs. Here is a rundown of the major categories as well as some other, indirect expenses that should also be considered:
Calculating the Pre-Operational Start-up Expenses
The first task is to figure out the costs associated with turning your business idea into an operational entity before the business is even running. Here is a breakdown of the major pre-operation expenses:
- Product Research and Development. This start-up expense includes all the money required to develop a product prototype and eventually produce a marketable version. It also includes any market research. Keep in mind that product R&D can be a significant expense particularly for those who are developing their own products.
- Facilities. You need to include not only the costs of securing a property to operate your venture, but also any costs associated with making it ready for business. Some examples of facilities expenses are: security deposits, furniture and fixtures, renovations, and signage.
- Equipment. This category includes the cost of all the equipment and machinery your business will need to operate during the first year. Depending on the nature of your business and the expense involved, you will need to decide whether some or all of the equipment will be purchased or leased and if items need to be new or if they can be purchased second-hand. Typical items in this category include: office equipment, production tools and equipment, machinery, and shipping equipment.
- Start-up Inventory. Start-up inventory expenses cover the cost of any initial stock of materials, finished products, and/or supplies that you need to begin operations.
- Advertising and Marketing. Many entrepreneurs choose to run pre-launch advertising campaigns or grand-opening promotions to generate advanced interest in their businesses. You should make sure to include any costs associated with these initiatives, such as printed materials, promotional products, and paid for advertisements.
- Other Startup Expenses. Make sure to include any additional costs associated with establishing a new business, such as licenses and permits, professional fees for the services of an attorney, accountant, or other professional consultant, insurance deposits, and fees to set up the business structure.
Determining Fixed and Variable Expenses for the First Year
Aside from the expenses incurred before operation, you should also estimate the monthly fixed costs and variable expenses that your business may incur during its first year of operation. You should be more clear about this information as you make various decisions regarding your new business, such where the business will be located, what kind of structure it will have, and who you will hire.
Your fixed expenses are the ones that do not change in response to sales volume. Here are some of the most common fixed expenses:
- Equipment Lease Payments
- Office Supplies
- Business insurance
- Professional fees
- Employee Compensation
- Business Loan Payment
Variable expenses on the other hand are ones that vary according to production and sales volume. Some common variable expenses include:
- Sales commissions
- The cost of raw materials
- Wholesale price of goods to be re-sold
- Packaging and shipping costs
- Income taxes
The Indirect Expenses of Small and Home Business Start-up
As I mentioned above, new entrepreneurs should take some time to figure out what their living expenses will be and how they will be covered while they are busy starting and building up their businesses.
Here are a few things to keep in mind:
- What are your current average monthly living expenses?
- What is your expected income during this time? (Will you be taking time away from a job to focus on your business?)
- Do you have any assets to rely on before the business becomes profitable?