Start Up Costs
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It’s difficult to accurately estimate business start up costs, but nevertheless it’s critical, especially to convince any investors or bank that you’ve done your homework in respect of start up expenses.
A great place to start is by identifying areas of major expense These are known as expense categories.Most expenses can be explained as fixed costs or variable costs.
Start Up Costs that Need Estimating
Fixed costs are one-off costs, or costs that occur periodically but do not vary with business activity. In reality no cost is truly fixed, these types of cost tend to step up at certain points of business activity (e.g. if you had to move to new business premises)
Other expenditures are variable. Variable costs change with the level of activity in the business. As Sales increase so would the activity to support those sales (marketing, production, distribution etc), and hence the costs associated with performing those activities would rise too.
The key thing is to develop realistic start up estimates from meaningful, reasonable and believable sales forecasts. The forecast needs supporting with evidence collected from market research, both primary (went out and interviewed some potential customers) and secondary (looked up some market research data in the library or on the web) and other real businesses that have a trading history.
Use Quotations to Support Start Up Estimates
The backbone of your business start up expenses should be based on competitive quotes. Best practice for obtaining quotes is to collect at least three quotes from different suppliers. This enables you to ascertain whether you’re first and second quotes were high or low or typical.
Expenses such as rent, equipment, marketing, public relations, legal fees, raw materials, internet services etc can all be accurately estimated using the quotations method.
It is quite important when comparing quotes to consider features or exclusions, and where possible ask for a quote based upon a specification provided by you, so that they are readily comparable.
It’s not necessary to include quotations in your business plan, but it is useful to have the back up with you if you’re going to present it. Don’t forget that as soon as you have commenced trading you can quickly change the costs if they’re way out of the ball park so to speak.
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