Small Business Startup Cost

OPERATIONS

Many business plans fail to adequately address some very basic requirements when starting out or expanding an ongoing business. The entrepreneur, in many cases, simply budgets so much money to cover the costs of office space, equipment, office supplies, telephone and other expense items that seem inconsequential. That can be a fatal error. Potential investors, observing this irreverence for detail, become suspicious. They can worry that the entrepreneur is not maintaining tight fiscal control of costs. Fiscal responsibility requires detail.

Organization & Key Personnel: Over the years we have observed that wages, salaries and employee benefits comprise the single largest cost center of an operating budget in the overwhelming majority of companies. Furthermore, despite excellent planning and funding, businesses fail, for a lack of qualified personnel, to operate the venture. It is imperative to provide an overview of work experience and education of the owners and key personnel who will operate the company. An organizational chart becomes more important with a greater number of employees. A job title matrix should also be included, incorporating number of employees per position, starting compensation, hiring dates, and any other data that impacts expenses.

The organization chart above was developed for a client. Even a small organization accomplishes more internal control with a graphic organization chart and job descriptions. This eliminates any questions and problems that can arise between employees, even in a small business.

Fixed Asset Acquisition: Most business start-ups require the acquisition of some form of assets, including office furniture, office equipment and computers. Larger start-ups can require the purchase or lease of manufacturing equipment, machinery, tools, vehicles and more. And don’t forget you can convert ownership of personal items to the company. For example, you may have a computer for personal use. Convert it to company ownership to bypass the need to purchase or lease another one. This reduces start-up costs and increases your equity investment in the venture.

Get quotations on the acquisition cost of all these items. It can be as simple as searching hard copy or online catalogues of office furniture outlets, or more demanding like securing the best quote on a piece of equipment. The greater the cost the more likely you will need to secure competitive quotes. Don't assume these costs.

Start-up Costs : If you are a start-up, think about operating costs. You will have those monthly and periodic expenses of telephone, office lease, utilities including water and electricity, professional and other contract services. Include the costs of acquiring tangible assets and monthly employee expenses from the categories above. The key to developing projected start-up costs is to determine what point in time the amount of monthly cash coming in is greater than the monthly disbursements. Typically, start-up costs cover operating overhead for 6 to 9 and 12 months. Please remember an investor does not want to support expenses for an extended length of time before income exceeds expenses. For example, many failed dot-com's incurred expenses greater than income for periods in excess of 1 and 2 years. Today's investor will simply not accept those conditions. Frankly, commercial lenders never did accept them. As you develop the cash flow projections, the start-up costs will be revised upward or downward. The following is a simple example in a retail environment:

Start-up Costs

Initial Inventory	$10,000
Computer	2,000
Signage	1,000
Register (Computerized)	3,000
Institutional Equipment	3,000
Advertising	2,000
Occupational Licenses	100
Professional Fees	500
Leasehold Improvements	1,900
Operating (Working) Capital	7,500

TOTAL START UP COSTS	$31,000

Owner's Capital Investment	$15,000
Financing Sought	$16,000

Note: Investors and commercial lenders are not anxious to finance the salaries of the ownership. Commercial lenders refer to "deferred compensation" - the owner is expected to defer personal compensation until company cash flow is positive and continuous over a period of consecutive months. In this manner the company can service (pay) debt, cover the costs of sales and operating overhead, and still have sufficient cash on hand to address emergencies.