What are the first items of expense that I must estimate?

    Published: 06-16-2009
    Views: 11,429
    Financial expert Fred Glave discusses the first items of expense to estimate.

    Speaker: What are the first items of expense that I must estimate?

    Fred Glave: What you need to do is begin to estimate all those expenses that you are going to have to spend even before you open your doors for business. If you have heard of the spreadsheet called startup expenses, you will see a list of items there under each of those categories you want to make a detailed list of each and every item that you are going to have to purchase or spend money on.

    Then you want to go out and get some estimates and don't get just one estimate, you want to talk to a number of vendors so you can get the best price and you want to consider things other than just price such as service, payment terms, reliability, quality etcetera. In that process, again I emphasize that you need to spend attention to the detail and get the very best possible price because you are trying to minimize your startup expenses. Particularly, for example if you are in the restaurant business, you never buy new equipment on restaurant business. There is a lot of used equipment around that is in very good shape and you can minimize your startup expenses quite significantly. So attention detail is the keyword in this activity. First in our list is lease hold improvements. These are the expenses you are going to have to spend to remodel your space whether it would be at home or something that you have rented in order to make it suitable for your customers when you opened your doors. Again, you want to get multiple estimates and don't guess on anything. Make sure you go out and get quotes otherwise you will surely underestimate your expenses. Having made your facility ready for business, you are still going to have to equip it. So again you are going to have to spend money for what we call capital equipment. For example, the restaurant business it's going to be all the cookers and fryers and refrigeration equipment. Even in an Internet business, you may need special servers and other types of computer equipment. You may even need special air conditioning supplies. Again, and we repeat this several times is make a detailed itemized list, don't guess and get multiple quotes and in all of these estimates one of the things you want to recognize, you will probably forget some things. So always add a contingency factor for the other items you haven't yet identified that factor may be as high as 20%, but certainly I would add a contingency factor of at least 5-10% on these estimates.

    Third item, there is location and admin expenses. Location of course is rent. Most small businesses are not going to buy a building in order to start business. So you are probably going to rent or lease some space. Before you get right, before you sign a lease, you want to make sure you have the right space and you know how much it's going to cost. Usually, you are going to have to pay the first month's rent and the last month's rent and then if it's going to take you several months to get ready to open your doors, you are going to have to pay rent for the space in those intervening months. All of those numbers added up have to be included in the amount of rent that you have estimate in your pre startup expenses. You will also have to pay for other things such as insurance, utilities. Again, where you will have to make a deposit upfront and pay for ongoing utilities for the months of stay if it takes you to startup your business.

    Particularly, if you need to hire other people and you need to spend two or three months having them prepare for you to open your doors, you will have to include their salary and their unemployment insurance expenses as well in those estimates. So for all of these items, the conservative and your estimates and again add a contingency because there is probably some things that you haven't identified upfront.

    If you are in the manufacturing business, you are going to have to have product on hand to sell for the very first day when you open your doors. This is called inventory. Now, you are probably going to be manufacturing more than one type of product, so you want to make an estimate of how much of each product that you need to build ahead of time. However, in this case, you want to be conservative. Many businesses got into trouble, because they build too much inventory and then not been able to sell it. The final startup expense is advertising and promotion expense. Now, small business usually cannot afford to spend advertising in the media or print like big businesses can because it's simply too expensive and it's not going to be cost-effective. But you will need business cards, like they have to develop some promotion with material and brochures. Often, you also want to go to trade shows to learn what the competition is doing and as well as or perhaps make an introduction of your product. So you will need to include all of the expenses of travel and trade shows fees as a part of your overall advertising and promotional expenses. This is one where it's easy to spend an awful lot of money. So again, you want to be conservative, but again I would recommend that you also include a contingency because you will certainly find some things that you can spend some money on that will be very beneficial for you in introducing your product and you want to be able to sure you have enough money to do so. Now, we are quite down yet, you will find on the spreadsheet an item called other expenses and each business may have some unique expenses that go beyond the categories that we have all talked about here, rather than go through all possibilities in detail. We simply leave it on the spreadsheet that if your business requires some unique activities that are going to cost money, make sure you include them at this point.

    Finally, you can't start with an empty bank account. You are going to have to have some money in the bank, fund this. You could either leave this to later or you can make an estimate of the amount of money you need to start your business and then after we complete the cash flow analysis, you can go back and revise that quantity. I would include an amount of money here which is your best guesstimate at this time of how much money total you are going to need to start your business and put that in this spreadsheet now. You will always have to go back and revise it later, but at least it gives you a starting point to work with. 2