Estimating Unknown Expenses 0

How do you estimate specific costs for a new business? How do you predict expenses? Normally you need some experience. If you have no idea, then you might think again about starting this business. Maybe your team should add somebody who does have experience, and can make estimates. Here is why.

In the real world, there are no standard costs for anything. Your expenses will depend, not on the type of business, but rather on your specific strategy, your specific location, and other specifics of your business situation. You might be able to find recommended expense levels in some books, websites, or other sources, but don’t expect that kind of information to be available for all businesses. Don’t think that there is some source you’re missing that lists standard costs for different kinds of business start-ups.

One general exception to this rule is franchised businesses. If you look to start a business as a franchisee, you can expect the franchisor to have some starting lists of normal costs. This is part of what you pay for when you decide to build a franchise business instead of developing one completely by yourself. Since you are going to pay for this information, make sure you choose a successful franchisor, one that provides real business value. There are a lot of would-be franchisors who don’t really fulfill their promise.

Another exception, in some rare cases, is a sample business plan. If you happen to have a good match between a sample business plan and the business you want to build, then a sample plan can be helpful. However, do not depend on this likelihood, because really good matches with sample plans are rare. A good match would have to match your strategy, your location, and even your year of starting — expense levels for a couple of years ago won’t be the same today. Expense levels for a different location won’t be the same for your location. There are good reasons for this lack of generalized information. Business expenses depend on you, not on the type of business.

Take restaurants as an example. Imagine how much different the starting costs for a very expensive high-fashion restaurant in the best part of New York, serving the best possible French haute cuisine are from the starting costs of a small restaurant somewhere in the middle of the country, in a small town, serving sandwiches and French fries. The point is that starting costs aren’t set according to the type of business, they are determined according to what you, the author of the business plan, decides. As another example, consider the rent expense for a business office or manufacturing plant. This is an important element in the costs of any business, but no one outside your area can tell you what rent is going to be. You have to consider locations in your area, for your business. You must think about how big a space you want, what your target market is, how important the location is to that market. Then you have to make telephone calls and talk to people and find out rents for prospective locations that might work for you, by asking real estate people, or looking in the ads in the newspaper, or whatever. There is nobody in the world who can tell you what rent is for one type of business or another, because what matters is where you are, and the choices you make. That’s why people usually develop their own business plans. Sample plans help, and they may give you some good examples and ideas, but the best business plan is the one you develop yourself.

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

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