The costs of establishing a business will vary from one operation to the next. However, in order to be successful as a small business it is imperative that you have a well-structured budget in place. The cash requirements for one business will differ dramatically from those of another, and businesses also vary in terms of liquidity that is required at different stages of operations.
Given these unique exigencies, it is impossible to formulate a ‘one-size-fits-all’ strategy for businesses. Consider that certain businesses are resource and equipment intensive, while others require vast human capital resources. These stark differences have dramatic effects on the funding required to get a business up and running, and keep it profitable.
The most important question to ask in terms of estimating startup costs is the following: What costs are optional and what costs are essential?
- Startup Costs
Your startup budget should only take into consideration those costs that are vital to the initial operation. These fees will include items like the lease for your office space or building, incorporation fees, seed capital to get you running and the like. Discretionary spending items are those which are optional. As a business, you will come across many optional expenses such as deciding to go with cloud-based computing or purchase the software and servers. Other discretionary spending items include things like furniture and fittings, choosing between a fleet of new cars or used and certified vehicles etc.
- Insurance Costs
As you can imagine, there are many debits and credits to consider in your income statement and balance sheet as a new business. It is important to divide these items up into fixed and variable expenses, because this will help you to eliminate the fluff and focus on the nuts and bolts of your operation. Variable expenses include things like packaging, inventory, shipping options, commissions, and the like. It is not always a good idea to go cheap and sacrifice quality in the process. However, it is advisable to be as frugal as possible during the infancy stages of your company’s development.
For example, business insurance is an expense that many novices may not factor into the equation from the get-go. This type of coverage is geared to protect your business assets from losses during regular business activity. It includes things like legal liability, damage to property, and risks related to your employees. But there are also other types of insurance costs to bear in mind, including things like car insurance premiums on company vehicles.
- Covering Costs
You always want to ensure that you can cover these expenses adequately without adversely affecting your company’s cash flow or reserves. To ascertain the viability of your business as a new entrepreneur, ask yourself the following 10 questions:
- What type of business am I going to run?
- What market am I targeting?
- What range of products/services will I be selling or providing?
- What makes my business unique?
- What is the time to market for my products/services?
- What are my insurance requirements?
- How will I conduct the advertising/marketing and management of my business?
- What legal structure will my business operations take?
- What are my startup capital requirements?
- What are my employee and supplier requirements?
Of course, there are many other questions that need to be answered when evaluating the costs of a new business operation. Suffice it to say, the type of business you’re running and the framework that you adopt will determine the cost structure you require.