How to Estimate Startup Costs – Writing a Business Plan
Simply put, startup costs are the money you’ll need to launch your business and operate it for one year. One of the fundamental roles of a business plan is to help you determine the amount of money needed to start your venture. It’s easy to begin strong, but even the best businesses can stutter and stall simply because of unrealistic goals and underestimating the needed financial resources. If your business gets mired down financially, so does your credit, and you’ll soon find out how difficult it will be to secure more money. You may also find yourself paying a higher interest rate to non-traditional lenders. The simplest way to avoid this pitfall is due diligence and careful consideration of the startup costs. Start-up costs are crucial for your bank loan business plan and investor business plan, and a business plan expert can help you navigate these. Taking advantage of a business plan writing service is money well spent and a legitimate deductible expense. If you’re unsure who to hire, a good starting point is an internet search along the line of “business plan writing services near me.”
The easiest method to estimate startup costs is to work out three sections – spending on assets, spending on expenses, and a 12-month sales forecast.
Spending on Assets
Businesses fall into three categories – brick and mortar, service, and online – and assets will vary for each. Startup assets are those items that are essential to launching the business. The keyword here is “essential.” For example, while a general contractor would love to have a new truck with all the bells and whistles, it’s unnecessary when an older reliable model does. Brick-and-mortar businesses will list assets such as desks, shelves, tables, cash registers, and inventory. A service business such as mobile pet grooming will include items like a vehicle, a table, scissors, and shears. An online homemade soap business asset could consist of pots, thermometers, moulds, oils, etc. Itemize each asset along with the cost. This will require some time and research, but generally, the information is right at your fingertips. Please resist the temptation to include computers and technology as assets because they are, in fact, expenses and can be deducted from taxable income.
Spending on Expenses
Expenses can be put into one of two categories. The first is one-time expenses, things that you purchase once. These include incorporation fees, permits, logo design, website design, signage, and computers and technology. The second category is ongoing expenses, and items in this list could include business taxes, accounting services, business plan writing services, legal services, insurance, payroll and benefits, and utilities. When making your pitch deck to lenders, be prepared to give a high-level view of fixed (lease, insurance, utilities) and variable (payroll, shipping, etc.) expenses. After listing assets and expenses, add the two together.
The third list determines how much cash will be needed for the period between the business launch and when it finally has the sales to cover costs and expenses. The most effective way to do this is by creating a monthly sales forecast spreadsheet covering 12 months. Many factors can cause business income to fluctuate. A furnace repair business, for example, will likely experience a lull during warmer weather, and a gift store is usually quite hectic around significant holidays. For each month, calculate the estimated sales, costs, and expenses. Subtract the costs and expenses from the sales for each month. This will provide a clear picture of potential cash shortfalls and is helpful in projecting when a business is likely to break even. Working out startup costs is a great time to talk to folks who are running similar businesses. Your local chamber of commerce is another solid resource. Connect with experienced business owners who are almost always pleased to lend a hand or dispense valuable advice to new entrepreneurs.
One last caution
Avoid the temptation to “bootstrap” your startup costs. Bootstrapping happens when an entrepreneur attempts to spend as little as possible and stretches every single dollar. The danger in this behaviour is underestimating your needs and tanking the business due to a lack of funds. Looking for business plan writers in Canada? Contact me here, and I will be happy to help you estimate startup costs for your next business plan.