Setting up a new business is not as easy as some people think it is, especially if this is something that has never been done before by those involved. It requires careful planning, research, financial analysis and many other things which can be found in any good book on running a small business or startup company (which usually includes an overview of these). While most entrepreneurs know what their budget will allow them to do, they may not have all the information needed to properly assess whether or not this money should be used for anything else. This article aims at giving such businesses a basic understanding of what expenses there are when starting out, along with some tips on how best to manage them. What follows is a brief explanation of what kinds of costs there are associated with the start-up process, followed by some tips on how one would go about managing them.
Before we get into more detail, let's take a look at some common terms relating to business costs. The following list explains some of the key ones commonly referred to among both owners and accountants alike:
Start Up Costs: These are typically considered those items that must be spent during the first few months after incorporation until the revenues from operations begin paying back fixed overhead and salaries. Examples include rent/lease payments, legal fees, advertising costs, inventory purchases, etc.
Running Cost: Generally speaking, these refer to direct operating costs incurred each month over time. They represent the actual dollars expended to run the business, including payroll, utilities, supplies, repairs, insurance, taxes, interest expense, depreciation charges, amortization, travel, entertainment, etc.
Operating Profit: Operating profit is simply gross margin minus variable cost. In other words, it represents the amount left over once fixed and indirect costs have been subtracted from total revenue. For example, if sales were $1 million and fixed overhead was $500k, then the remaining $900k could be called "operating profit."
Losses: Are essentially nonrecurring costs such as bad debt write-offs, stock options compensation adjustments, and litigation settlements. Losses are also known as extraordinary items because they occur infrequently enough so as to qualify as unexpected events.
In order to better understand what kind of costs exist when starting a business, lets discuss several of the major categories of expenditure. Some examples follow below:
Rent Expense - refers to payment made directly to the landlord for space usage. Typical examples include leasing office space, warehouse or retail outlets.
Utility Expenses - electricity, gas, water, telephone service, internet access, garbage collection, parking spaces, vehicle maintenance, janitorial services, etc.
Advertising Expenses - print ads, billboards, commercials, radio spots, television advertisements, public relations, trade shows, website development, SEO, PPC, social media marketing, etc.
Supplies Expense - goods purchased for production, distribution, warehousing, customer support, employee uniforms, furniture, computer hardware and software, cleaning products, safety equipment, shipping materials, packaging tape, labels, gift wrapping paper, postage stamps, mailing envelopes, shipping boxes, promotional material, office supplies, etc.
Repairs & Maintenance Expense - hiring contractors, subcontractors, suppliers, consultants, repair parts, professional advice, property management, security personnel, landscapers, painters, plumbers, electricians, heating technicians, air conditioning engineers, furnace techs, carpenters, welders, window installers, gardeners, locksmiths, pest controllers, etc.
Tax Expense - federal income tax paid by the corporation, state franchise fee, local city taxes, real estate transfers, etc.
Interest Expense - bank overdraft fees, late penalties, loan repayment fees, credit card interest, etc.
Depreciation Expense - asset obsolescence, plant replacement, machinery, computers, vehicles, buildings, land improvements, fixtures, building modifications, etc.
Amortization Expense - loans taken against future earnings, leases signed beyond year end, capitalized assets, prepaid expenses, etc.
Travel Expense - meals while traveling, lodging, rental cars, airport lounge memberships, gasoline for driving between meetings, etc.
Entertainment Expense - meals while entertaining clients, gifts given to employees, client appreciation parties, dinners, luncheons, golf outings, day trips, etc.
These are just a handful of typical expenses that arise when setting up a business. There are many others but the above list provides a general idea of what is meant by "business costs," what they entail, and where they come from. Now that we've got an idea of what constitutes "costs" in relation to the setting up of a business, let us examine ways of managing them. Below are a variety of suggestions for controlling spending within the scope of available resources:
Manage Cash Flow Wisely
Cash flow is king! Poor management of working capital leads to wasted opportunities, missed deadlines, poor quality workmanship, increased stress levels, unhappy customers, dissatisfied investors, diminished brand image, etc. Make sure that you have sufficient funds to pay for orders placed well ahead of time and make sure that you don't incur unnecessary financing fees. Most importantly, always keep a close eye on your cash position and ensure that you only spend money that you actually have, otherwise you risk defaulting on promises to vendors and lenders.
Create a Budget
A budget serves two purposes. First, it helps guide decisions regarding expenditures, investments, staffing changes, product launches, mergers and acquisitions, expansion plans, and much more. Second, it gives you a clear picture of your current situation, thus allowing you to see areas where savings might be achieved through strategic reallocation of existing resources. A solid budget is essential to ensuring success in today's competitive world. Without accurate forecasts, it becomes difficult to determine if companies are making wise investment decisions, and ultimately affects their ability to grow.
The largest portion of business costs tends to involve labor. Payroll processing takes place every week, meaning that mistakes often happen without being noticed due to lack of oversight. By outsourcing payroll processing to experienced professionals, you'll gain peace of mind knowing that you're getting high-quality results every single time. You can even choose to use a combination of in house staff and outsourced workers depending upon specific requirements. If you need help finding a reputable provider, check out our directory here.
Contract negotiation skills are invaluable tools that anyone looking to set up a business should learn early on. Contract negotiations require skillful communication, persistence, patience, and flexibility. Having strong negotiating abilities means having greater control over deals as opposed to letting dealmakers dictate terms and conditions. Negotiation is particularly important when dealing with large corporations, banks, government agencies, and various stakeholders. Remember, contracts aren't written in stone. Be willing to negotiate and ask questions whenever possible. Don't settle for less than what you deserve. With proper knowledge and experience, you too can become skilled negotiators!
Increase Profits Through Product Innovation
If innovation isn't already part of your corporate culture, now may be the right time to adopt it! Businesses that focus primarily on improving efficiency rather than merely increasing volume tend to survive longer. On the contrary, growth oriented firms quickly lose relevance as market demand shifts towards lower priced alternatives. Focusing on developing innovative products and services that provide added value to consumers ensures long term profitability and sustainability.
Business goals serve as a roadmap that guides decision makers toward achieving desired outcomes. Setting objectives is critical since it helps identify actions necessary for reaching targets. Once established, goals must be reviewed regularly to remain relevant. When goals change, managers must decide whether this reflects progress or regression. Reviewing performance periodically enables organizations to adapt accordingly. Managers who fail to incorporate regular goal reviews are likely to suffer stagnation in their efforts.
Use Technology Effectively
Technology plays a vital role in supporting productivity throughout virtually all facets of modern life, including business. However, technology itself cannot solve problems alone. People, policies, processes, systems, procedures, structures, and other factors play equally significant roles. As such, effective integration of technological solutions into overall organizational effectiveness is crucial. Smartly integrating technologies across departments and functions enhances collaboration and increases efficiencies.
As mentioned earlier, investing wisely is paramount to ensuring sustainable profitability. Start ups face unique challenges when determining how to allocate capital, namely the uncertainty surrounding future earning streams. Carefully monitoring cash reserves, using conservative estimates, and forecasting potential returns are smart methods for minimizing losses. Consider implementing a formal system for analyzing risks and benefits prior to taking big bets. Doing so prevents unwise decisions and minimizes the chances of losing everything overnight.
Setting up a new company can be expensive, but it doesn't have to break your budget or leave you wondering where all that money went. You'll need to pay for things like legal work, filing paperwork, printing materials, marketing, sales training, inventory, etc. But there's also equipment such as computers, phones, desks, chairs, copiers, fax machines, printers, furniture, office supplies -- and if you're in retail, customers! And don't forget labor expenses (salaries) and taxes. All these factors must be factored into your initial startup cost estimates before deciding how much capital investment you will make on each particular item.
The next question many entrepreneurs ask is what are some of those other common startup costs? What are they called? How do I figure them into my overall numbers? What are their functions? Are they necessary? Is one really more important than another? Should we spend our limited resources elsewhere instead? It may seem daunting at first, so here are answers to some typical questions about startup costs.
There are three basic kinds of startup costs: overhead, fixed and variable. Overhead costs include rent/lease payments, utilities, salaries, insurance and employee benefits. These are not dependent upon the amount of revenue generated by the business and therefore remain constant over time even when revenues decrease because of poor performance. Examples would be property tax, water bill, mortgage interest, advertising, credit card processing charges, etc.
Fixed costs are those which stay relatively stable regardless of fluctuations in volume. They reflect actual expenditures incurred during a period rather than predictions based on anticipated future results. Typical examples of this category would be leasehold improvements and fixtures, computer hardware and software, telephone lines, postage meters, repairs, maintenance, payroll, legal services, accounting, security systems, building renovations, electricity, heating fuel, air conditioning, janitorial service, cleaning contractors, medical exams, health insurance premiums, professional dues, auto club memberships, travel club subscriptions, newspapers, magazines, newsletters, dry cleaners, laundry, delivery services, meals, catering, postage stamps, stationery, photocopying, mailing envelopes, shipping, freight transportation, moving & storage companies, taxes, insurance, interest rates, etc.
Variable costs vary according to production levels. For example, the higher your sales, the less variable costs per unit sold. This means that the cost per product decreases with increased volumes produced. Variable costs include commissions paid to employees, sales incentives, wages, salaries, overtime compensation, bonuses, depreciation allowances, returns, discounts, rebates, discounts, markups, profit margins, packing slips and labels, display racks, promotional items, signage, office space, lighting, safety signs, copy machine usage, paper clips, pens, pencils, forms, phone calls, gas, oil change visits, car washes, parking tickets, gym membership dues, etc., depending on whether you produce goods or provide services.
Fee type refers to the way in which fees are charged. There are two main categories: flat rate or percentage. In either case, fees should be carefully analyzed against your expected outcome to determine whether they are reasonable and justified. If a fee does not relate directly to the value received, then it probably isn't a good idea. A general rule of thumb is that any fee above 5 percent should be questioned. The most common mistake made among small businesses is charging too high a flat fee without considering the true cost of doing business. For instance, just because something has been done a certain number of times previously does not mean that it is worth its price tag. Consider the following scenario: you own a restaurant franchise and want to expand your current location. As part of your expansion plans, you decide to add a drive through window. Your franchisor tells you that adding a drive through window requires $60,000 worth of modifications to your existing kitchen area. However, since you already had your original design approved by the franchisor, he suggests that you simply modify your menu prices instead. Now let me repeat myself again: Why would anyone agree to modify their menu prices? That's right - no one. So, unless you were sure that having this feature added would increase profits significantly enough to cover the additional charge, why would you ever consider paying for it? Another reason to avoid large lump sum fees is that you could end up spending years trying to collect payment from clients who are late making their accounts payable. Many people believe that giving away freebies helps build customer loyalty and brand recognition while increasing market share at little or no extra financial risk. Free samples, coupons, gift certificates, offers of discounted merchandise, low-cost upgrades, mailings and direct mail campaigns are very effective ways of generating buzz around a new product or service. On the downside however, offering freebies comes at great risk. Customers might take advantage of your generosity and use "free" products themselves, lowering your average selling price. Also, sometimes consumers assume that they got something for nothing and stop expecting to receive the same level of quality or service. Unfortunately, once a client believes she got her purchase for free, she often expects others to follow suit.
In addition to helping protect investors, fees serve several other useful purposes:
To compensate parties involved for their efforts
As noted earlier, fees help ensure proper distribution of funds within your organization. Investors expect to get compensated for their equity stake in the venture. Employees deserve fair remuneration for their hard work. Vendors want to be fairly rewarded for providing goods and services. By properly calculating fees and distributing them throughout your organization, everyone gets his due.
Provide stability to your operations
This is especially true for smaller ventures. When you're starting out, you won't know exactly how many hours you'll find yourself working. Some days you'll only see five clients, while other days you'll see twenty. Without predictable income coming in year after year, startups tend to fall apart pretty quickly. Fees allow you to set aside reserves, thus ensuring that you'll always have enough money to keep going.
Business plans require careful thought and preparation. Not only do they describe what the company intends to accomplish, but also how it plans to achieve those goals. Estimating the required staffing, research, development, material purchases, etc. is highly complex and difficult, and usually involves numerous subjective assumptions. Unless someone knows exactly how much money is needed upfront, it's almost impossible to come up with accurate figures. Fees give you a concrete benchmark against which to compare everything else.
Protect against fraud
When you're dealing with millions of dollars, as well as sensitive personal data, it's easy to commit errors. Fraudulent activity poses a serious threat to both public confidence in the banking system and private enterprise itself. To prevent fraudulent activities associated with insufficient funds, banks typically impose overdraft policies on transactions involving checks drawn on insufficient funds. Similarly, merchants may refuse to process credit cards if the account holder appears insolvent. Although such measures place restrictions on legitimate uses of credit cards, they nevertheless represent significant savings in terms of administrative effort and loss prevention.
Create long term contracts
While negotiating contracts, suppliers try to extract maximum benefit for minimal expenditure. Since you cannot foresee every eventuality, you may wish to lock in key vendors for longer periods of time. Longer contracts reduce your exposure to unexpected changes in pricing. At the same time, however, you run the risk of losing flexibility in managing your finances. Setting minimum guarantees and establishing penalty clauses gives you greater control over expenditures. While penalties are rarely invoked, they nonetheless serve as powerful deterrents against unnecessary spending.
Allow for efficient management
Managing budgets and tracking expenses helps you better allocate available resources. Having access to detailed reports makes it easier to identify inefficient practices and correct problems early on. Fees also give lenders and creditors peace of mind, knowing that you've taken care to safeguard their investments.
Ease compliance issues
Large organizations employ hundreds of lawyers and consultants whose sole job is to oversee regulatory requirements imposed by federal agencies, state governments, municipalities, counties, special authorities, industry associations and similar entities. Most small firms lack sufficient expertise to handle all of these responsibilities simultaneously. Therefore, they often hire outside experts to manage various aspects of their affairs. Whether you choose to go the lawyer route or engage external consulting assistance, fees play an integral role in protecting you from liability.
When starting a new business, it's important that you have an accurate picture of what it will take to get going. You want to know how much money you need for everything from incorporation through to marketing and sales. That way, when you're writing your business plan or drawing up a budget, you can be sure not to overspend on any one area.
With so many different types of businesses out there, the costs associated with each vary greatly -- especially if you have never run a similar type before. To help break down these costs into more manageable chunks, we've put together this list of common expenses in various industries. It should give you a good idea about where to look next time you're thinking about starting something new.
The first thing you'll notice as you read through our list is that most of them consist mainly of three things: 1) registration/incorporation fee, 2) annual operating license fee, and 3) ongoing monthly service charges (like phone bills). These are all standard elements of running a business. The second category consists mostly of miscellaneous "one-off" items such as accounting services, website design, consulting work, etc. This section includes other non-recurring expenses like rent, insurance, taxes, advertising, utilities, inventory, supplies, equipment, travel expenses, credit card processing, office space, and even salaries for employees. Finally, we include some example costs by industry.
For those who don't already own their own businesses, check out HowToOwnYourBusiness.com [http://www.ownyourbusiness.com] for information on buying, selling, franchising, licensing, leasing, trading, and investing in small business ventures.
Incorporating a company requires certain legal procedures which differ depending upon whether its purpose is commercial or charitable. Incorporated companies are taxed at the federal level whereas 501(c)(3) charitable organizations are exempt from tax liability. The following table shows typical costs for incorporating a corporation under either California law or New York Law.
Costs are based on estimates provided by LegalZoom. As with any project estimate, actual costs may change due to factors beyond your control. Please consult a lawyer concerning specific circumstances.
Legal Costs* Corporation $1,988-$2,766 Limited Liability Company $4,838 -$5,996
State Tax** Corporation $6,000+ LLC NONE
Federal Income $0.00 Sales $0.00
Taxes Paid State & Federal Combined $0.00
Start Up Expenses $11,500
Annual Operating Fees*** $17,750
Monthly Service Fee**** $200 per month
Assets Acquired Inventory $10,000
Goodwill Value***** $100,000
Total StartUp Cost $41,250
Source: Business KnowHow http://www.bizknowhow.com
* In addition to initial filing fees, state franchise fees must also be paid annually. ** Depending on location, additional annual fees may apply. *** Monthly service charge only applies to customers within the same locale. **** Based on pricing schedule offered by Google AdWords. Total estimated yearly operating expense including customer acquisition costs would be approximately $34,950.
Now let's expand on some of the categories mentioned above. We'll cover what they mean specifically, then move onto discussing example costs by industry.
You might wonder why you'd ever pay someone to do anything for free. Well, sometimes it makes sense because doing it yourself doesn't require a lot of specialized knowledge. For instance, you could probably learn how to use QuickBooks without paying anyone else. Or maybe you just feel uncomfortable asking someone for help. If you fall into one of these two scenarios, consider outsourcing. Outsourcing simply means getting someone else to handle tasks for which you lack expertise. A few popular outsourced products and services include bookkeeping, payroll, data entry, Internet research, graphic design, medical transcription, Web development, copywriting, technical support, event planning, administrative assistant, etc. Although it seems counterintuitive, hiring people to perform jobs instead of owning them usually saves both parties money. And since outsourcing offers flexibility and convenience, it often appeals to freelancers and part-time workers. Read our article on finding great online freelance jobs for tips on searching job boards and networking with recruiters.
Examples of fees:
Become CEO of your own lead generation software company, just follow our battle-tested guidelines and rake in the profits.