Estimating Realistic Startup Costs 40

Businesses spend money before they ever open their doors. Start-up expenses are those expenses incurred before the business is running. Many people underestimate start-up costs and start their business in a haphazard, unplanned way. This can work… but is usually a harder way to do it. Customers are wary of brand new businesses with makeshift logistics.

Use a start-up worksheet to plan your initial financing. You’ll need this information to set up initial business balances and to estimate startup expenses. Don’t underestimate costs.

  • Startup expenses. These are expenses that happen before the beginning of the plan, before the first month. For example, many new companies incur expenses for legal work, logo design, brochures, site selection and improvements, and other expenses.
  • Start-up assets. Typical start-up assets are cash (the money in the bank when the company starts), and in many cases starting inventory. Other starting assets are both current and long-term, such as equipment, office furniture, machinery, etc.
  • Start-up financing. This includes both capital investment and loans. The only investment amounts or loan amounts that belong in the Start-up table are those that happen before the beginning of the plan. Whatever happens during or after the first month should go instead into the Cash Flow table, which will automatically adjust the Balance Sheet.

Timing is everything

Some people are confused by the specific definition of start-up expenses, start-up assets, and start-up financing. They would prefer to have a broader, more generic definition that includes, say, expenses incurred during the first year, or the first few months, of the plan. Unfortunately this would also lead to double counting of expenses and non standard financial statements. All the expenses incurred during the first year have to appear in the Profit and Loss statement of the first year, and all expenses incurred before that have to appear as start-up expenses.

Don’t count expenses twice: they go in Start-up or Profit and Loss, but not both. The only difference is timing. Don’t buy assets twice: they go into the Start-up if you acquire them before the starting date. Otherwise, put them in the Profit and Loss.

Expenses vs. assets

Many people can be confused by the accounting distinction between expenses and assets. For example, they’d like to record research and development as assets instead of expenses, because those expenses create intellectual property. However, standard accounting and taxation law are both strict on the distinction:

  • Expenses are deductible against income, so they reduce taxable income.
  • Assets are not deductible against income.

Start up Expense Chart

What a company spends to acquire assets is not deductible against income. For example, money spent on inventory is not deductible as expense. Only when the inventory is sold, and therefore becomes cost of goods sold or cost of sales, does it reduce income.

Generally companies want to maximize deductions against income as expenses, not assets, because this minimizes the tax burden. With that in mind, seasoned business owners and accountants will always want to account for money spent on development as expenses, not assets. This is generally much better than accounting for this expenditure as buying assets, such as patents or product rights. Assets look better on the books than expenses, but there is rarely any clear and obvious correlation between money spent on research and development and market value of intellectual property. Companies that account for development as generating assets can often end up with vastly overstated assets, and questionable financials statements.

Another common misconception involves expensed equipment. The U.S. Internal Revenue Service allows a limited amount of office equipment purchases to be called expenses, not purchase of assets. You should check with your accountant to find out the current limits of this rule. As a result, expensed equipment is taking advantage of the allowance. After your company has used up the allowance, then additional purchases have to go into assets, not expenses. This treatment also indicates the general preference for expenses over assets, when you have a choice.

Why you don’t want to capitalize expenses

Sometimes people want to treat expenses as assets. Ironically, that’s usually a bad idea, for several reasons:

  • Money spent buying assets isn’t tax deductible. Money spent on expenses is deductible.
  • Capitalizing expenses creates the danger of overstating assets.
  • If you capitalized the expense, it appears on your books as an asset. Having useless assets on the accounting books is not a good thing.

Types of start-up financing

  • Investment is you or someone else puts in the company. It ends up as Paid-in Capital in the Balance Sheet. This is the classic concept of business investment, taking ownership in a company, risking money in the hope of gaining money later.
  • Accounts payable are debts that will end up as Accounts Payable in the Balance Sheet. Generally this means credit-card debt. This number becomes the starting balance of your Balance Sheet.
  • Current borrowing is standard debt, borrowing from banks, Small Business Administration, or other current borrowing.
  • Other current liabilities are additional liabilities that don’t have interest charges. This is where you put loans from founders, family members, or friends. We aren’t recommending interest-free loans for financing, by the way, but when they happen, this is where they go.
  • Long-term liabilities are long-term debt, long-term loans.

Investment Chart

Expect a Loss at Start-up

The loss at start-up is very common…at this point in the life of the company, you’ve already incurred tax-deductible expenses, but you don’t have sales yet. So you have a loss. Don’t be surprised; it’s normal.

Cash Balance on Starting Date

Cash requirements is an estimate of how much money your start-up company needs to have in its checking account when it starts. In general, your Cash Balance on Starting Date is the money you raised as investments or loans minus the cash you spend on expenses and assets. As you build your plan, watch your cash flow projections. If your cash balance drops below zero then you need to increase your financing or reduce expenses. Many entrepreneurs decide they want to raise more cash than they need so they’ll have money left over for contingencies.

However, although that makes good sense when you can do it, it is hard to explain that to investors. The outside investors don’t want to give you more money than you need, for obvious reasons—its their money!

About the Author Tim Berry is the founder of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry. Follow Tim on Google+ Read more »

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  • Dagmar

    I found this very informative, thank you for having it available! Wonderful!

  • Laurie

    Very helpful information, it answered the question to my situation.

  • http://www.sovacollection.com Kevin Thomas

    Startup costs – Assets / Expenditure
    I have a new small business and want to keep the books for all the activities since we started. What i can’t get my head around is what ledger book i am supposed to reflect the recording of my assets costs (receipts) and my expenditure costs (receipts) for the time period i ahve taken to get to the point that we started our business? I am not making any sales yet as i am a clothing retail business.

  • http://www.paloalto.com Casi Deatherage

    Hello Kevin,

    There are several resources to your questions, some even on our website. You can locate our expert advice tab at the top of the page. You can also go to Google and search for forums designed to be of assistance to people who are searching for more complex help.

    Goodluck!

    Casi Deatherage
    Palo Alto Software
    Customer Care

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  • Pingback: Estimating Expenses for Your Startup « Learned At SCORE Chicago

  • Byron S

    I found the information very useful. I am thinking of buying a franchise, alot of initial expenses are included in the franchise fee. How would I put those figures into a statement?

  • Cory

    I would like to expand my farming operation and was wondering what advice you could give on acquiring loans to do so.Thanks

  • Pingback: Estimating Realistic Startup Costs

  • Karen Cooper

    Hi
    I enjoyed reading the informatin you have made available. Can you offer some advice.
    I am interested in buying an existising business. I have no security to help me with this. The estimated cost is $80,000.00. Where can I go for help?

    Regards

  • michael

    Hello.

    I really like reading the inform you give me and it was real helpful to me
    I would some more information on starting up a launday mate and if it wounld be a good investment and where i can go to get it?
    Thank you

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    Hello.
    The information you provided was very helpful. I wan’t to start a private chef and small catering business. What type of insurance do I need? I have no funds to start with, but I’am working to save money to start small. I do not want any loans of any sorts. Paying off school loans and other expenses. I want to live my dream as culinary professional private chef. Help me decide what is right.

    Thank you

  • Linda Jacobs

    Hi my name is Linda, how do i estimate start cost for a child care business?
    I have no start up money and the building need some work.

  • CLARENCE SEAY II

    I am tring to start up a snow removal business this winter season of 2009. I have priced the equipment that I need, but I have no truck nor do I have the start up money to do so. How do I get the needed funds to do what I have to do, and still take care of my wife and son?

  • Priscilla S

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  • Mark High

    I am interested in making a business plan for my company ! Me and a partner of mine is starting up a Construction Company, and I was wanting to know how to get start money to do so, and to maintain my family ?

  • Dido

    Dumb question, but from the example above, what is the formula for Total Capital? How do you get $499K?

  • http://www.archmailledesigns.com Copper Jewelry

    I’ve always been bad about getting realistic start up costs. I get the costs of materials, advertising, and all the bills in order but I often forget to figure in my own payment and what I need to survive/eat for the months that I’m waiting on sales… that often leaves me getting a part time job every couple of months to catch up again.

  • Wilson Nganga

    I’ve already started a business,a bar,and it’s been running for close to a month now but I haven’t yet recorded sales as I had projected and as that isn’t enough it needs refinance. Did i overlook some issues because i don’t have cash with me bearing in mind that i have a family to take care of. May i change my plan inorder to cater for both or should i hang the project. I’ll appreciate your help. Thanks.

  • Theresa Vaughn

    I’ve been in reproduction for about 15 yrs, so I want to start my own business in that field. I’m trying not to think too big because the equipment can be very expensive. This will help me to narrow my expenses to what I would like to spend, and finance. GREAT INFORMATION!

  • Joseph High

    I already own a home in Las Vegas which is paid off, my wife and I want to start a small bed and breakfast with license costs and permits what would you say roughly would be a start up cost for this?

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    I am interested in making a business plan for my company ! We are going starting up a acquirer credit card Company, and I would like to know on macro view how to get start money to do so, and the investments is required?

  • Joe

    People this information is set as a guideline. Asking the author what your expected start-up costs for specific business ventures is like asking someone else to do all the work for you. You want to start a specific business you need to find the drive and determination to gather and analyze the information to determine what your own start up costs might be. Call around, make the effort to find out all of the information on your own, it will help make your business specific to you. Not someone who can project random estimates. Only you hold the key to finding out what your specific costs might entail.

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  • Mina

    Thank you! Got some good ideas. There were things here that I didn’t consider and now I feel like I got a bit of a better idea of what to expect. I know there’s going to be some unexpected expenses that will come out of know where but bring them on! I’m ready! :)

  • Tony Snapp

    I will be retiring in the next year and have decided to open a flower shop in a small midwest town near St. Joe MO. I plan on gathering as much of the equipment as I can prior to retirement, and have the business ready to open 2 months after I retire from my currant job. How do I figure my start up cost and where can I find an investor and funding?

    ——————

    Hi Tony,

    Besides this article and others like it on bplans.com you can use the Startup Costs Calculator to estimate your startup costs.

    As for investors and funding – again, we offer many articles on this subject. Please do a search on investors or how to get funding and you’ll find some great advice there.

    And of course, it’s always best to check out your local SBDC or SCORE offices for assistance. That’s what they’re there for!

    Hope that helps you out some.

    ‘Chelle Parmele

  • rhonda

    I agree with Joe a few comments up. I have been researching for months about starting a mobile coffee/espresso business in my town. While the experience has been very frustrating and time consuming wading thru hundreds of websites looking for information I have finally gotten to the point to purchase the business plan. One think I can suggest to anyone wanting to start up a business is to find a mentor! I just happen to have a neighbor that owns a small coffee drive thru and he has been very generous with his knowledge and training. His experience in this business is invaluable so if you are able to find someone in your business of choice interview them and see if you can learn from them. Read, Read, Read and good luck!! Oh and always respect your mentor’s ‘territory’:)

  • http://Bplans.com Judy

    I want to start a day spa but I don’t know where to look to find competitive pricing or start-up costs

    • http://www.businessingeneral.com Chelle Parmele

      That’s a great question Judy.

      I’m going to give you a couple of resources for this. One being the industry research reports that we sell on Palo Alto Software. You can look at the sample report on that page I linked to. The report will show you the average information in whatever regional area you picked, down to County level.

      I would also suggest contacting your local Chamber of Commerce and/or Small Business Development Center or SCORE office. They will be incredibly helpful in tracking down resources and getting you started.

      ‘Chelle Parmele

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  • Donna S

    Is it possible to get funding for start up costs without having any capital investment of your own to put into a company ? How strongly does a good business plan factor into this? Thanks :)

  • Tanya

    If part of your business loan includes the purchase of a building and inventory, can the bank use the building you are purchasing as collateral?

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    Very informative article. Not only do you outline what it might cost to get a business up and running (which most new business owners are interested in) but really begins to build the foundation on what can actually be expensed. Most new business owners only realize this when tax returns are due and their CPA is saying you might have a couple of issues here.
    Very well put together.

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  • michelle harris

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    I bought a bobcat for my new bobcat service business, can I expense it or does it have to be considered an asset?