Start-up Expenses


Start-up Expenses

You will have start-up expenses before you even begin operating your business. It is important to estimate these expenses accurately, and then to plan where you will get sufficient capital. This is a research project and, the more thorough you are with your research, the less chance you will leave out important expenses or underestimate them.

Even with the best of research, however, opening a new business has a way of costing more than you anticipate. There are two ways to make allowances for surprise expenses. The first is to add a little “padding” to each item in the budget. The problem with that approach, however, is that it destroys the accuracy of your carefully wrought plan. The second approach is to add a separate line item, which we call contingencies, to account for the unforeseeable.

Talk to others who have started similar businesses to get a good idea of how much to allow for contingencies. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20% of the total of all other Start-up expenses.







Start-up Expenses - Estimation

Nearly everyone who has ever started a business has underestimated the costs, and then faced the danger of running with inadequate capital reserves. The key to avoiding this pitfall is to adopt a rigorous approach to your research and planning.

Expenses - Begin by estimating expenses. What will it cost you to get your business up and running? The key to accuracy here is attention to detail. For each category of expense, draw up a list of everything you will need to purchase.

This will include both tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance). Then determine where you might purchase these goods or services. Research more than one vendor; i.e.: comparison shop. Do not look at price alone; terms of payment, delivery, reliability, and service are also important.

Contingencies - Add a reserve for contingencies. Be sure to explain in your narrative how you decided on the amount you are putting into this reserve. If you cannot get good information, we recommend a rule of thumb that contingencies should equal at least 20% of the total of all other Start-up expenses.

Working capital - You cannot open with an empty bank account. You need a cash cushion to meet expenses while the business gets going. Eventually you should do a 12-month cash flow projection. This is where you will work out your estimate of working capital needs. For now, either leave this line blank or put in your best rough guess. After you have done your cash flow, you can come back and enter the carefully researched figure.

Sources - Now that you have estimated how much capital will be needed to start, you should turn your attention to the top part of this worksheet. Enter the amounts you will put in yourself, how much will be injected by partners or investors, and how much will be supplied by borrowing.

Collateral - If you will be using this plan to support a bank loan request, use the section near the bottom to show what assets are offered as collateral to secure the loan, and give your estimate of the value of these items. Be prepared to offer some proof of your estimates of collateral values.

Explain your research and how you arrived at your forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also explain in detail how much will be contributed by each investor and what percent ownership each will have.




Start-up Expenses

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Setting up and running a business is a time consuming task - you need to be dedicated and focused and able to structure your time in order to be successful. The rewards of starting up your own business can be great, but think carefully if you have the attributes and right sort of personality to cope with going it alone.

You will need to decide what business structure you will trade under (sole trader, limited company or partnership) and what obligations and responsibilities you will have as the owner of a new business. Read more about these business stuctures.

Identify your skills and particularly your weaknesses. Be honest and ask friends and colleagues for input. If you are less hot in certain areas, hire people with complimentary skills or seek professional advice when you need it.

Even if you have the best idea in the world, you are unlikely to make a killing instantly. Be conservative with your funding estimates and either save enough money to keep you going while the business goes through its initial stages, or present your bank manager with a well thought out business plan and request sufficient start up funds.

Never underestimate it. Thoroughly research the competitors in your chosen industry. Indentify any weaknesses they may have and try to ensure your product or service is a cut above theirs. Competition is a very healthy thing, but you need to do constant research and never be complacent.

Make sure that there is a market for your product or service. Just as Texaco wouldn't build a petrol station next door to two others, a startup business should ensure that the market for buyers or users is strong in the area he intends to set up in.

Never underestimate how helpful this stage can be. Even if you never consult the plan again, it is amazing how many thoughts and ideas can evolve if you put all your thoughts down on paper in a structured format. Not only will you require a well thought-out plan when seeking funding or new business partners, but a decent plan will help you focus on your goals and ensure you are less likely to stray from your real priorities. You can read our Business Plan Guides for ideas.

As your business expands, you may well need to hire people to manage certain aspects of your operation. You need to ensure they have the right skills for the job. Above all, you need to be able to "click" with the people you work with - this simply cannot be underestimated.

When running your business, a few words with a trusted adviser (accountant, lawyer, business adviser) can make the difference between success and failure. Before hiring a professional, you should visit several to compare and don't necessarily make the decision based purely on price.

Start-up Failure

The biggest causes of failure for start ups are - setting your sights too high, not researching your market thoroughly, hiring the wrong staff and not putting enough funds aside for contingency.

There are a number of factors you must have in place to ensure a successful startup. These are:

  1. Legal Base: This includes such factors as your licenses, insurances and setting up your company.

  2. Your Market: You need to decide who you want to market your services to and where they will be.

  3. Your Services: You now need to decide what services you are going to offer to these people, how you would like to package them and what prices you wish to charge.

  4. Your Premises: Look around for your new premises, preferably in the middle of your potential market. Remember that central to your success is the position you choose for your business. Foot traffic past your door and many potential customers within a short journey from your new business is vital to you finding customers.

  5. Web Site: Most businesses have them now – so even if you don’t want to set one up now – at least buy and hold onto your domain name – in case someone else gets hold of it.

  6. Your Business Plan: Whether you are looking for funding or not – a business plan is the foundation of a new business.

  7. Your Funding: You should now take your business plan and look around for funding, starting with your Bank.

  8. Your Staff: Good staff that reflect your business ideals are vital so spend some time spend some time finding the best staff you can.

  9. Marketing: So important and so difficult to get right. Start with a good marketing strategy and go from there.

  10. Grand Opening: Make sure you make a splash and attract as much curiosity as possible.

Start-up - Securing Finance

Businesses have trouble securing financing at the best of times. Normally you have to have two to three years of solid financials before a money lender like a bank will even consider lending you money. Often you need to have a strong personal credit record to be eligible for a decent business loan from start-up. There are other lenders that offer business loans specifically for start-ups so the process is easier now than it was a decade ago. However, to stand the best chance of securing those much needed funds, follow these four steps to cement getting approved:

Be a homeowner

As a homeowner you will already have created a history of borrowing and are in possession of a large asset that can be used as security. Lenders are risk conscious. Business start-ups are in a high risk bracket. There is no way to tell if your idea will work, or you are a good money manager or if the execution of the idea will go to planned. They have to rely on your existing assets to pay the debt in the event of default.

Include all your assets in your application

The level of borrowing you can secure is normally determined by the amount of security you can place against the loan. Being a homeowner is suitable as usually that is the biggest asset a person or a family owns. In a business, there may be more than one person applying so each person should list their assets as security to garner the highest loan possible.

Items that are considered assets include:

  • Cash

  • Property

  • Shares

  • Bonds

  • Vehicles

The higher your asset value the more money you are able to borrow. Be careful not to overextend yourself as you are liable to lose each asset you use as security against your loan.

Have a good income record

Have your old tax returns on record to demonstrate that you have had a good history of income. Even though starting a new business will affect this, if it is demonstrated that you are capable earner then it does make the lender less cautious.

Account exactly where the business loan will be allocated

This is vitally important to getting your loan approved at the maximum level. If the lender can see where exactly the money is going they can ascertain if your application is viable. If you just make an application of $50,000 with no indication of how you are going to spend it then you may well get rejected. If you make an application for $100,000, where the total is itemized you are likely to be approved:

  • $15,000 is for premises

  • $50,000 is for equipment

  • $25,000 is for inventory

  • $10,000 is for staff

From this quick list, the money lender can see that if you default they can retrieve money from equipment and inventory that will account for 75% of the total loan as well as the security you have put up.

You have a great idea for a business but don’t have enough cash to get it off the ground? Funding is often the main component that keeps an entrepreneur from his or her dream. Have you been searching for government grants in the hopes of finding free money for your start up? Are you looking for investors and angels? Are you discovering there are no Venture Capitalists handing out start up funds?

The reality is that when it comes to funding your own small business, you need to be able to provide at least some of the financing yourself. Even if you qualify for an SBA (Small Business Administration) backed loan, you must still pitch in a good percentage yourself (20% – 30%).

And when it comes to grants, there really are no grants available for small start-ups. Sure, there are some here and there for $500 - $1000 for niche groups. But even a small business will have start up expenses upwards of $10,000. And Venture Capitalists are looking for multimillion dollar deals that will net them millions in return. They have no interest in helping the little guy with his little business.

So, where do you find funding?

Most people don’t even know how to begin to figure their start up costs. Here is a list of typical start up expenses:

  • security deposit

  • rent

  • utilities

  • signage

  • advertising

  • permits

  • legal fees

  • accounting fees

  • insurance

  • payroll

  • inventory

  • supplies

  • bank fees

  • loan payments

  • equipment

  • pos system

  • racking

  • counters

  • credit merchant acct

  • office furniture

  • office machines

  • taxes, taxes and more taxes

Of course your own particular expenses will vary according to your business, but this list should give you a good starting point. Once you have a better idea of your initial start up costs you will be in a position to know if you need to look for loans.







Start-up Expenses - Business Plan

Additionally, with your business plan in hand, you will be in a much better position to approach lenders. Whether these lenders are in the form of friends or family or bank loan officers, they will want to see your vision on paper. They will want to know exactly what you are attempting to accomplish. They will want to know if your idea is viable and worth taking a risk on. And they will want to know if you have contributed anything of your own. Are you yourself willing to take a risk on your idea? Have you accumulated some savings? Have you sold off any assets? Have you considered a home equity loan? Are you willing to continue working a regular job while getting your business off the ground? Continuing to work will at least provide you with enough to take care of your personal expenses while your business is just getting started.

After you have exhausted these options, there are still other little known organizations and groups that can help you with additional capital. You will find much more detailed information at the site listed below. Understand, that while finding the funds for your small business start up can take time and effort it can be done. It is done all the time. You can do it too.







Start with the business plan and be that much closer to your dream

Starting your own business can be a very confusing process. Follow this simple small business start up guide to stay on track.

You have the perfect business idea; you have a market, a location, and a budget. It's time to start that business! Or is it? There are many details involved in setting up a small business. Before you sell that first product, or sign on that first client, read this guide and make sure you have covered all the details.

  • Do you have a business plan? A business plan is essential for obtaining financing. It will also help you run and manage your business.

  • Have you decided which type of business entity that you will form? You can choose to set up as a sole proprietorship, a partnership, a cooperative or a corporation. You will need to research these business forms to determine which is the best for you and your business.

  • Have you registered your business name? Contact the Secretary of State's office to find out if the name you want is available. They will also register the name for you. The fee for this service varies by state

  • Have you filed all the local forms and applied for all the necessary permits and licenses? Check with your town clerk.

  • Do you have a lawyer? You should meet with an attorney to determine what type of legal liability your business will entail. Your attorney should be able to advise you on local, and state regulations relating to your form of business.

  • Do you have an accountant? You should meet with an accountant to determine what your tax liabilities will be. An accountant can also advise you in the type of accounting method that will be best for your business.

  • Have you filed all the necessary state forms? You will need a state identification number for filing sales tax forms, and state income tax

  • Do you have all the insurance you need? Do you need to change your car or homeowner's insurance policy? Do you need to obtain liability or business insurance? Check with your agent.

  • Will you be hiring employees? Check with the state Department of Labor to determine what your responsibilities are. You will also need to acquire copies of forms I-9 and W-4 from the IRS. I-9 certifies that the employee is a U.S. citizen or resident alien. Form W-4 determines the amount of taxes which will be withheld from the employee's pay.

Now that you have completed the checklist, you are ready to start that business. You should refer to the checklist periodically to ensure that you are staying in compliance with all federal, state, and local regulations.

As an entrepreneur you can start your own business without major investment. Making it grow and succeed follows naturally from this method, along with some basic principles also covered.

You have two things going for you when you want to start your own business: some marketable skill or product and time.

Many people, when they think about starting their own business, think in terms of instant success and wealth. Success and wealth are both possible, but unless you have more tens of thousands of dollars to start with than most people, it won't be instant. Think in terms of two to five years of steady growth, and you can see a real future. Your new business should be paying its own bills within a month or two. After that, it can begin to contribute to paying yours.

You do have time. It may not seem like it, as busy as you are, but in the final analysis, you control the clock, it does not control you. Starting a business takes time, no question about it. If you are working a full-time job, the time has to come in the evenings and weekends. This is okay to start. Later, as you get more and more business, you may have to change to a part-time job to keep up with your own business. Until finally, you will only be doing what you want to do.

How do you do it? First, you ignore all the people who will try to discourage you. Tell them they are completely correct, you don't have a chance, then put them out of your mind. Then get to work.

What you need to start is an answering machine, a thousand sheets of letterhead, and stamps. You can get letterhead from your local print shop, out of their books of standard styles. Envelopes to match, of course. The major, and maybe the only, secret to starting a business is letting lots and lots of people know about it. No matter what your skill or product, some people need it. You just have to let enough people know you offer it, and you will get orders.

Step One. If you are free during the day, make phone calls. Lots of phone calls. Fifty or a hundred a day. If you don't like talking on the phone, do it anyway. It is best to start with businesses that might conceivably need your service/product. Start with the obvious, then branch out into related businesses. You repair clocks? Call clockmakers, clock sellers, other clock repairmen. Then pawnshops, clock societies, steeple people. Antique dealers, auctioneers, anyone who would benefit from a repaired clock. Work straight from the Yellow Pages.

When you call them, introduce yourself, tell them what you do, and ask if you can send them information. That's it. Get a name and address if they say okay. Sure, you can chat with them, and occasionally someone will need your services right away, but that is not the point. You want names and addresses.

If you are not free during the day, you can still make calls on Saturdays, but mainly you skip straight to Step Two. All those people you contacted in Step One are expecting something in the mail. Step Two is to send them something. If you have to skip Step One, you can still send things to the same people you would have called. You will need a Zip Code book from a local bookstore or the Post Office because the Yellow Pages don't give you the Zip Code.

What you send them is a letter. Keep it short and to the point. These are my services, these are my qualifications, these are my prices. Tell them when and how you can be reached. Be sure to offer a free consultation, if you are offering a service, and a guarantee for either product or service. Your letter must have no spelling mistakes, no bad grammar, nothing unprofessional about it. Have someone you trust proofread it, even if you are very, very good at English. Plan on mailing 100 letters a week, as an absolute minimum. 200 is more than twice as good.

And that will do it. That is all there is to it. Everything else is regular business details.

For instance, you have to keep very close track of all expenses and income, completely separate from any other expenses or income. Start a new checking account for your business as soon as you can, and in the meantime, keep very good records. If you don't, your business will fail, and you don't want that.

You have to build a mailing list, from all these letters and phone calls, so you can send repeat mailings. You can send another letter, or an information sheet, or even put together a newsletter if you are of a mind. Sometimes you might have to mail ten or twenty times before someone responds. A mailing list is much more valuable with actual names, so do whatever you can to get them. Otherwise use titles, even President if you don't know any more appropriate.

Return all phone calls. Check your answering machine frequently, and return all calls as soon as you can.

Finally and most important, produce a good product or provide a good service. Your business will grow and succeed by referrals and repeat business, and those both depend on excellence. Always try to provide a little bit more than expected. Polish that clock as well as fixing it. No extra charge.

There are ways to get around the problem of insufficient funds when starting a business. Through creative means, many of us were able to successfully jump-start our businesses with shoestring budgets.

Shortage of capital is always a common problem faced by many home business owners. Yet, as many of us can attest, the lack of start-up money did not exactly deter our dream of starting our own businesses. We have found that there are ways to get around the problem of insufficient funds. Through creative means, many of us are able to successfully jump-start our businesses with shoestring budgets.

  • Work from home. If you are struggling to start a business on a shoestring budget, a beautiful office space downtown is the last thing that should be on your mind. Instead, opt to work from your home. Working from your own home will allow you to save on rental or leasing fees, fixtures or equipment, cost of decorating or fixing the office space, and other fixed or recurring expenses associated with an office or retail space. You can also choose to simply use equipment and furniture in your house that are still in good working condition, instead of hiring a designer to do a complete make-over to transform an unused room or unutilized space into your home office. The savings can allow you to put your limited resources to creating an excellent product and providing good customer service.

  • Plus, you may be able to deduct certain expenses incurred from running the business at home from your tax bill. If you work from home, you may be able to deduct a portion of your rent or mortgage interest, as well as a percentage of your utilities as a business expense.

  • Think second-hand. You can also save start-up capital by buying used items for your business. While a little extra legwork may be needed, you can get substantial savings by buying used furniture, credit card terminals, lamps or other office equipment that you may need. Visit online auctions such as eBay, Internet discount retailers such as Overstock.com, online communities such as Craigslist.com, or second hand retailers such as the nationwide Aaron Rents & Sells chains for items you may need. You can also check out government auctions and newspaper classifieds for used equipment.

  • Scour the auction market. Check out online auction marketplaces such as eBay for your office supplies, packaging and shipping materials. Online auctions nowadays offer brand new items on wholesale or discounted prices. Chances are you will find the prices so much more competitive (and lower!) than your neighborhood supply retail stores. A recent check of a box of padded mailers on eBay show listings that cost $0.98 cents per piece (including shipping) as against $0.60 cents a piece from a well-known office supply retailer chain. That s significant savings for your business!

The world of the venture capitalists is a multi-billion dollar world. At any point in time there are billions of dollars of venture capital available. For the start up, operational, or expansion needs of all kinds and sizes of businesses. And if you have a viable business or idea you can get the venture capital that you seek.

At one time venture capitalists favored the hi-tech cutting edge kinds of businesses. But, today the so called low-tech businesses are attracting venture capital as readily as only the hi-tech industry once did. And venture capital in amounts of several hundred thousand dollars to many millions of dollars can be attracted in 90 days or less. Here are some guidelines to help you get venture capital to start up, more effectively operate, or expand your business.







Demonstrable Economic Justification

You should start by evaluating your business or idea for it Demonstrable Economic Justification (DEJ). This evaluation will answer a number of very important questions. Such as: How big is the market for your products or services? What kind of competition do you have? What problem does your products or services solve? Does your market know they have the problem you solve? If not, large blocks of capital may be needed to educate your market, which could be a problem.

Write a short executive summary of your venture capital idea or project. This executive summary should describe your proposal in enough detail to give prospective venture capitalists a clear idea of: Why you want this capital? How you'll use this capital?

  • What kind of competition you face?

  • What kind of profits will this capital create? and,

  • Who is on your management team?

Make a list of prospective venture capitalists who fund the kind of business you have. This list can be prepared from public sources of information. Such as, computer searches, phone book directories for major U.S. cities, and numerous other sources. The possibilities are endless for research sources that you can use.

Send your executive summary to the venture capitalists that your research uncovers. And keep sending your executive summary around until you get a positive response from a number of prospective venture capitalists. The brief format of your executive summary makes it much easier for venture capitalists to review your proposal, than a full business plan will.

Prepare a full business plan of your project or idea, once your get a positive response to your executive summary of 3 or more venture capitalists. In preparing your business plan you should try to keep it to between 15 to 20 pages, if at all possible. Because anything longer than this very seldom gets read. Yet you should list in the appendix of your business plan any other information or materials you have available. And if more information is needed by the venture capitalists, they can always request that specific information.

Give more focus to the marketing section of your business plan than other sections. While, all sections of your business plan are important, most business plan focus on the profit projections. Yes, your profit projections are indeed important, but it is the marketing section that tell how those profit projections will be achieved.

Now use these guidelines to help you to get the venture capital that you seek. So that you can effectively start up, more effectively operate, or expand your business. Because the money is out there for you now all you have to do is go get it..

Start-up Expenses - The Financial Plan

Sound financial management is one of the best ways for your business to remain profitable and solvent. How well you manage the finances of your business is the cornerstone of every successful business venture. Each year thousands of potentially successful businesses fail because of poor financial management. As a business owner, you will need to identify and implement policies that will lead to and ensure that you will meet your financial obligations.

To effectively manage your finances, plan a sound, realistic budget by determining the actual amount of money needed to open your business (start-up costs) and the amount needed to keep it open (operating costs). The first step to building a sound financial plan is to devise a start-up budget. Your start-up budget will usually include such one-time-only costs as major equipment, utility deposits, down payments, etc.

The start-up budget should allow for these expenses.

Start-up Budget

  • personnel (costs prior to opening)

  • legal/professional fees

  • occupancy

  • licenses/permits

  • equipment

  • insurance

  • supplies

  • advertising/promotions

  • salaries/wages

  • accounting

  • income

  • utilities

  • payroll expenses

An operating budget is prepared when you are actually ready to open for business. The operating budget will reflect your priorities in terms of how your spend your money, the expenses you will incur and how you will meet those expenses (income). Your operating budget also should include money to cover the first three to six months of operation. It should allow for the following expenses.

Operating Budget

  • personnel

  • insurance

  • rent

  • depreciation

  • loan payments

  • advertising/promotions

  • legal/accounting

  • miscellaneous expenses

  • supplies

  • payroll expenses

  • salaries/wages

  • utilities

  • dues/subscriptions/fees

  • taxes

  • repairs/maintenance

The financial section of your business plan should include any loan applications you've filed, a capital equipment and supply list, balance sheet, breakeven analysis, pro-forma income projections (profit and loss statement) and pro-forma cash flow. The income statement and cash flow projections should include a three-year summary, detail by month for the first year, and detail by quarter for the second and third years.

The accounting system and the inventory control system that you will be using is generally addressed in this section of the business plan also. If a franchise, the franchisor may stipulate in the franchise contract the type of accounting and inventory systems you may use. If this is the case, he or she should have a system already intact and you will be required to adopt this system. Whether you develop the accounting and inventory systems yourself, have an outside financial advisor develop the systems or the franchisor provides these systems, you will need to acquire a thorough understanding of each segment and how it operates. Your financial advisor can assist you in developing this section of your business plan.

The following questions should help you determine the amount of start-up capital you will need to purchase and open a franchise.

  • How much money do you have?

  • How much money will you need to purchase the franchise?

  • How much money will you need for start-up?

  • How much money will you need to stay in business?

  • Other questions that you will need to consider are:

  • What type of accounting system will your use? Is it a single entry or dual entry system?

  • What will your sales goals and profit goals for the coming year be? If a franchise, will the franchisor set your sales and profit goals? Or, will he or she expect you to reach and retain a certain sales level and profit margin?

  • What financial projections will you need to include in your business plan?

  • What kind of inventory control system will you use?

Your plan should include an explanation of all projections. Unless you are thoroughly familiar with financial statements, get help in preparing your cash flow and income statements and your balance sheet. Your aim is not to become a financial wizard, but to understand the financial tools well enough to gain their benefits. Your accountant or financial advisor can help you accomplish this goal.


A strong Business Plan may not guarantee success; but it could certainly prevent failure!




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