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Startup Costs ... |
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| Syllabus | Class Sessions | Links | Grading | Assignments | ||
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Startup Costs ... |
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| Syllabus | Class Sessions | Links | Grading | Assignments | ||
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Identify & Estimate Startup Costs |
Your first financial decision is to determine how much money it will take to open the doors. You may find that the amount is reasonable or too high. Sometimes the amount seems reasonable and obtainable but you decide that the potential profit isn't worth the work. Start up costs need to be estimated then operating expense and revenue streams need to be determined.
| Differentiate Start up Costs From Operating Expenses |
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Start-up Costs are one-time costs of Assets that usually won't recur for at least one year, likely longer or sometimes never.
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Operating Expenses are uses of some part of your Assets that recur predictably, usually measured on a monthly basis.
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| Why estimate start up costs? |
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| Some General Guidelines |
It is wise to have some allowance for contingencies, erring towards overestimating and adding for variance, rather than risk being short on capital. However, don't penalize yourself by being too conservative, and don't burden yourself with an excessive estimate of capital requirements or costs for financing. |
It may be months or years before the business is profitable. You will need to cover personal living expenses, have cash disbursements for normal operations exceeding receipts, need growth or expansion money, and so forth.
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For example, you may at first purchase inventory for resale but later expect to manufacture it yourself. Facilities, equipment, personnel, and so on may need to expand in stages with growth in demand. Banks & investors are more receptive to investing in businesses that plan well. Also, investors prefer to invest in stages and let your business prove itself rather than tie up all the money in one large risk. |
| Estimating your startup capital needs |
| Sources & Uses of Capital - As you develop and assess your needs for money to start the business and get the doors open, you will find that you are working with uses of capital that can be arranged into categories. As you add items to the categories you will often find that your capital needs are growing rapidly, perhaps getting much higher than your general estimate. As you begin looking for sources of capital you will make decisions about what is essential, and about how to lower the total capital needs to start the business. This is easily done if you follow a plan. The following is just such a plan. |
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STEPS in estimating start up capital needs:
8. Create an asset list
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1. Identify startup cost categories |
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This list is an organization that is typical. You can use any categorization or organization that makes sense to you and your readers for your particular business. Remember, it is your audience that you want to communicate with. As noted in previous material, the top two criteria that spearate the new business successes from the failures are:
Many categories below include both start up costs items that are necessary for getting your doors open and extra money for keeping the doors open and the business running successfully.
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| 2. IDENTIFY SPECIFIC ITEMS IN EACH CATEGORY. |
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LEGAL:
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RESEARCH & DEVELOPMENT:
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FURNITURE, FIXTURES & EQUIPMENT:
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LAND & BUILDING:
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REMODELING & IMPROVEMENTS:
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PREPAIDs& DEPOSITS:
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INVENTORY:
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PERSONNEL:
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CASH:
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LIVING EXPENSES:
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CONTINGENCY FUNDS:
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OTHERS:
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| 3. ATTACH A SPECIFIC DOLLAR AMOUNT TO EACH ITEM IN EACH CATEGORY. | ||
| (use list from above) | ||
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4. TOTAL START-UP COSTS. |
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LEGAL RESEARCH & DEVELOPMENT FURNITURE, FIXTURES & EQUIPMENT LAND & BUILDING REMODELING & IMPROVEMENTS PREPAIDs& DEPOSITS INVENTORY PERSONNEL CASH LIVING EXPENSES CONTINGENCY FUNDS OTHERS TOTAL STARTUP CAPITAL |
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__________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ __________ ======== |
| 5. DETERMINE WHETHER THEY ARE REALLY ESSENTIAL. |
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| 6. ARRANGE COST ESTIMATES INTO A PRESENTABLE FORM FOR A BUSINESS PLAN AND/OR LOAN PROPOSAL. |
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The typical forms required by investors and banks is in financial statement format. They usually want to see pro forma (estimated) financial statements based upon weekly or monthly for the first year of operations and then yearly summaries for the next three to five years. For start up costs, the following are typically called for financial statements. |
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| 7. MAKE KEY DECISIONS RELATED TO THESE COST ESTIMATES. |
| In step 5 you determined if each cost was essential and if there was a reasonable way to reduce any of them. Below are further decisions to make regarding the total capital needs and how you will manage them as a whole. |
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