Creating an accurate estimate of business start up costs is an important skill for prospective business owners who are looking to get financing for their business. Having a good idea of start up costs is important for business owners themselves, because it allows them to budget for their new business and determine exactly how much money they will have to borrow. However, many lenders, including banks and independent financiers, also require new businesses to furnish them with a breakdown of estimated start up costs before they agree to a loan. Use this sample estimate of start up costs to create an accurate budget for your new business.
Start up costs can be roughly divided into one-time and recurring expenses. One-time expenses are those that only need to be paid once, usually at the time the business begins operation. Some examples of one-time costs include a down payment on a property, franchise fees, equipment costs, licenses and permits, and legal fees. These costs can really add up and generally make the first few months a business is in operation its most expensive. However, these costs are also necessary and should not be ignored.
Recurring costs are those that must be paid more than once, on a fixed schedule. They can be further divided into variable and fixed costs. Variable costs change from payment to payment, and include things like utilities, the cost of supplies, shipping and maintenance. Fixed costs tend to be the same from payment to payment, such as with rent, administrative costs and insurance. When estimating variable costs for your start up, make your estimate high to provide you with a financial cushion.
Often, estimates of start up costs also include what you already have put towards starting your business. The most common start up asset is cash in the form of business loans. However, you may also have equipment or even products to sell before your business has opened its doors. Include a section for assets in your estimate of start up costs to create a fuller picture of what you really need to get your business off the ground. Assets also look good to potential investors, as they project the image that you are serious about the business and are already taking steps to make it a reality.
Making the Estimate Accurate
Business cost estimates should be realistic. To get an idea of realistic costs for each expense, see what other businesses in your area are paying for things like rent and insurance. You can also schedule a consultation with a financial adviser at a bank who has experience with local start ups. When deciding which expenses to include in your estimate, avoid those which are optional for starting the business. A good start up estimate is composed of only the essential costs, with a generous amount of funding allocated to each.
Some new businesses like to engage in bootstrapping, or making every dollar stretch as far as possible until the business breaks even. While this can be a good way to avoid going over budget early on, you should be careful that you do not allow yourself to become too optimistic when it comes to estimating costs. Make sure that you have not just enough money to afford your expenses, but also some extra to cover unexpected costs that may crop up after your business opens.
Take care to make your estimate of start up costs as accurate as you can. Low-balling the amount you need to get your business off the ground may temporarily make you look more appealing to investors, but it is a strategy that is all but guaranteed to backfire later on when your business is not making enough to cover expenses.
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