Estimating Startup Costs
Part 13 of Acey Gaspard’s Guide to Starting a Small Business – Made Simple
Correctly estimating a startup cost can lead to a successful startup, while an incorrect estimation could result in a financial disaster. You must invest the time and effort to come as close as possible to the actual startup costs for your business idea.
The Results of Inaccurate Startup Costs:
Estimating Too High
If your estimation is high, it could lead to a decision to abandon your business idea, and you could be losing out on the best opportunity of your life.
For example, if the estimate shows that getting a loan for the cost is unrealistic, and even if you did get the money, the business model can’t produce the profit and revenues to cover the expenses. You end up walking away, and it’s back to your day job.
Estimating Too low
If your estimate is low, there will be trouble ahead, and you could be three-quarters of the way and find that you have run out of cash with no means to borrow more. You had failed before you opened your door, and you have a pile of new debt while you’re back to your day job.
Estimating startup costs can be as simple as making a list and updating it as you start preparing for your grand opening, or it can be as time-consuming as getting quotes and pricing out everything you need.
A list will give you an idea, but it will be general and not very accurate; on the other hand, pricing out everything you need is time-consuming and tedious. You need to find a happy medium by doing some research and making the best possible estimate.
This post offers a few tips to get you started as well as resources from other authors to give you an extensive overview of how to estimate the startup costs for your business idea.
Find Out What You Need
The first thing to do when estimating startup costs is to determine what you need for the type of business you’re considering. If you don’t know what’s required, there’s no way to estimate startup costs, and there will be many issues you missed. You can start by searching for the examples below for your business idea.
Getting What You Need vs. What You Want
There are pros and cons to getting the best of the best. When you get the best products and services on the market, you may have better performance as well as all the bells and whistles. But with the best of the best comes a cost.
You must consider whether that cost will be covered by the profit you make from your business. In the startup phase of most companies, funds are limited, and with limited funds, you have to budget your startup cost so you will have enough money in the early stages of running your business.
Let’s look at an example:
You’re purchasing an all-in-one printer for your office. For a few thousand dollars, you can get a color laser printer that produces colorful photo-finish prints at lightning speeds, or you can get a black-and-white laser printer for under $300.
Both print, but one can print in color and the other, in black and white. Which do you really need? You may think, “Well, with the color, I could print out flyers and brochures right from my office.” This is true, but how many times do you actually do that? You could also get those printed at Staples for a few bucks when you need to.
Let’s look at the opposite view:
Your business depends on printing.
You’re just starting, so you want to save as much money as you can on startup costs. Instead of purchasing the right printer for the job, you buy a lower-cost model and think, “it’s only temporary.” The lower-cost model is $350, versus the $1250 model you need. You think you can save $900.
Off you go. In a month or two, you find the lower-class model can’t keep up with the demand. In four months, your printer is toast. Now you go out and buy the right printer for $1250. What have you saved? You paid $1250 plus $350, costing you $1600 for your printer. The more expensive printer ends up costing less in this example.
You need to find a happy medium between the two examples above and make sure you have the correct item for the job.
Get a Second Opinion
Once you have created your estimation, it would be a good idea to go over the list with a professional. In most cases, you will need a professional accountant for your business. Why not consult with one now before you open your doors?
Accountants can provide insights and identify financial problems before they happen. Even if you spend a few hundred dollars on consulting, it beats paying thousands of dollars or experiencing possible financial disaster for issues you didn’t foresee.
Create A Financial Buffer
Consider the example of a home renovation. Your budget for the improvement is a set amount, and then you discover you have mold in your basement, so your budget just went out the window. The same applies here to your budget for a piece of equipment if you find out it won’t do the job and you need to add another $1500 to upgrade.
This happens a lot. You may want to have a financial buffer for your startup costs. For example, you can plan for an additional 5%, 10%, or 20%. It may seem like a large buffer at 20%, but having that buffer in place may get you out of a jam. You can also keep that money on the side so that you’re not tempted to use it, but you know it’s there if you absolutely need it.
Sample Startup Cost List
Below is a simple list that may help you get started. The items may not all apply to your business, and other issues that do apply to your business may not be on this list — each company is different, but this list is a good place to start.
The list is divided into two parts: business startup costs and ongoing business operating costs.
If you want to make use of this list, print this, or create your list and write down a figure next to each item you need. Then add up the list, and you may have a good idea of what you need. Another tip is not to come up with a figure off the top of your head; you can search for each item in the list.
Business Startup Costs
$_______ Registration fees, legal fees, lease agreements, trademarks, name registrations, etc.
$_______ Special equipment
$_______ All-in-one printer
$_______ Office supplies
$_______ Office desk
$_______ Office furniture
$_______ Business sign
$_______ Product displays
$_______ Advertisements: flyers, ads, announcements, etc.
$_______ Grand opening costs: party, ads, giveaways, invitations, etc.
$_______ Licenses: you may need a license for your business
$_______ Operating Expenses
Ongoing Business Operating Costs
In addition to startup costs, you may want to forecast ongoing costs that you will need to budget for your business once you open your doors.
$_______ Merchant account fees
$_______ Bank fees
$_______ Rent or mortgage
$_______ Property tax
$_______ Utilities: electricity, heat, water, phone, Internet
$_______ Monthly subscriptions/Association fees
$_______ Loan repayment and interest
$_______ Employee benefits
$_______ Your income/salary
$_______ Special license fees
$_______ Emergency fund Personally, I like maintaining an emergency fund. This is like a “rainy day” account, where you can put some money away (say, a small percentage every day, week, or month) depending on how your business goes. This amount will help you when times are slow, so you can concentrate on the business and not on how you are going to make your next round of bills.
Now that you’ve listed your business startup costs and monthly operating expenses, you have a better idea of what you need to get in the business.
See the resources included in the post that will give you more ideas and insights that will help you estimate your startup costs.
The Latest about Estimating Startup Costs
In this section, you’ll be able to stay up to date on the latest related to this topic, including the latest news, Google searches and videos.
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