How to Manage Your Business Finances by Estimating Your Costs
If you have effectively analyzed your target markets, put into place an attention getting promotional plan and learned how to demonstrate the benefits of dealing with your company, you will start to receive money in return for providing satisfaction.
When people see that you keep your promises they will develop a loyalty to you and your business which will result in repeat sales. But a word of warning: earning money by selling to someone is only theoretical until you collect it! There are a million reasons why someone can delay paying you. And if you are not careful you can lose control of where the money goes once it arrives on your desk.
There are five parts to an effective financial management system for your small business: estimating costs and living by a budget; making frequent projections of profit and cash; developing a reliable collection technique and expense control program maintaining a dependable accounting system; and managing your tax situation. We will discuss the first strategy in this column.
There are many more people with good ideas than there are people who also demonstrate discipline in handling their business’s money. Some say that one of the main reasons businesses fail is because of lack of money.
We believe that it is because of lack of control of money. Don’t be overwhelmed. There are many convenient ways to learn how to manage your money–seminars at local colleges and Small Business Development Centers, do-it-yourself books, computer programs and government tax classes to mention just a few. In only a few hours per week you can create a sound system for managing your money.
Let’s take a look at the first step in setting up a reliable financial management system: financial estimates.
Checking Your Personal Financial Situation
Not starting with enough cash, known technically as being “undercapitalized”, is probably second only to not researching your business concept as a major cause of small business failure. This outcome is usually the result of inadequate advance planning during the pre-launch phase.
First and foremost you must estimate what your family expenses are and how you will assure that your business income is sufficient to pay them. You should sit down with your family and honestly discuss the minimum amount of money the household must have each month to provide security. Ask each member of the family to offer one or two areas where some expense can be reduced.
In addition to knowing your living costs, you must also be brutally honest about your current debt situation. During the 1980′s many families found themselves taking on increased debt in order to just get by. If you family is one of them, you should be realistic about your ability to take on more financial responsibility. New businesses almost always require more money to keep them running than the new owners estimate before starting. Remember: every dollar you must pay each month for credit card payments is a dollar not available to invest in marketing your new company.
To help you calculate your current personal financial situation you can use the My Current Financial Situation Worksheet below.
My Current Financial Situation
Monthly Income
Assets
My Paycheck
Cash On Hand
Spouse’s Pay
Car
Unemployment Payements
Property
Other
Furnishings
Total Income
Other Assets
Fixed Monthly Expenses
Total Assets
Car
Liabilities
Mortgage/Rent
Bank Loans
Utilities
Credit Cards
Groceries
Other Debt
Other
Total Liabilities
Variable Monthly Expense
Assets Minus iabilities(Networth)
Clothes
Entertainment
Gas/Oil
Other
Other Expenses
Insurance
Day Care
Other
Total Expenses
Income Minus Expenses
* “The Business Burden”
When you look at your monthly family income, you should consider what will happen financially if you quit your job to pursue your business full-time. Your expenses will not decrease much, but your income sure will. The difference between the family expenses and the family income other than yours can be called the “business burden.” What this means is that unless you want your family’s lifestyle to change dramatically, you must produce enough revenue from the business to cover the shortfall between expenses and the other household income. Every month that you do not produce enough sales to cover this amount, you must borrow to keep the family going.
Estimating Business Start-up Costs
In addition to providing enough money to pay your family living expenses for two-three months, you will need money to pay for a variety of one-time expenditures necessary to set up your business. Let’s take a look at typical expense categories required in setting up a new business:
Office Space
As locating one’s business at home becomes more acceptable, larger numbers of new businesses are able to save a major start-up expenses–rent. Renting an outside office, retail store, or warehouse space results in some significant startup expenses. Included among these are:
Rent deposits, usually one full month’s rent, which can range from 0 to over $ 1 000.
Utility deposits, averaging $ 100 per utility.
Insurance, costing from 0 to 00 per year — retail stores must often have plate glass insurance in addition to general business insurance.
Phone line installation, starting at per line, without any inside wire location work included.
Redecorating & renovation, which you sometimes can negotiate with the landlord to include this in your base rent.You usually must sign a multi-year lease to receive this however. This expense runs from 0 (you do the painting) to several thousand if you must build walls and add doors and windows.
Furnishings are needed whether you locate your office at home or in outside space. Most offices will require at a minimum a desk, chair, lamp, file cabinet and a bookcase or bookshelves. Additionally, you may wish to have a separate computer table. If you give yourself several months to search, you can often find used furnishings at house sales, bankruptcy auctions, and furniture resellers. A little touch-up paint and cleaning and used furniture can work quite well. You had better plan for 0 – 0 for furnishings.
Equipment
Wise use of electronic equipment can allow you to run your one-person business as professionally as your larger competitors. This is one category of expenditure where it pays to shop as the prices are continually dropping.
Telephones. Can be found in discount stores and catalogs, as well as direct from the phone companies. Plan on spending .00 for a reliable one-line phone and .00 for a good two-line phone.
Telefax. Increasingly just having a phone is not enough. Your customers expect to be able to send you something immediately by fax. Coated paper faxes run about 5.00 and plain paper faxes cost around 0.00
Computer. Take your pick! What a variety is available today. Currently some of the best deals are from Compaq and Apple. Learn what the main computer words mean and how a particular feature affects speed or ease of use. Then go around to both computer and discount stores to compare. And don’t forget catalog sellers such as Dell and Gateway, both of which make excellent computers. There are networks for buying used computers and a new chain of franchises sellers of used computers called Computer Renaissance, but it is probably not smart for a new small business computer user to buy a used computer.
Copiers. Rarely needed by a new business and are really an expensive luxury because of their tendency to break down. Rebuilt copiers with many high-speed features can be bought for under ,000.00.
Inventory
Retail stores require stock before they can open for business. Often the initial stock to fill a 500 square foot store (25′x 20′) costs over ,000.00.
Manufacturers are well advised to have a supply of raw materials on hand when they start so that they can keep up with orders. Industrial supply and material suppliers often insist on selling in minimum quantities which are larger than you need in the beginning, but which you must buy in order to get any materials. This often results in significant costs to you.
Telecommunications
At a minimum your business will require one telephone line and a telephone to attach to it. You may be able to get by for some time with your existing residential phone line, thereby avoiding a connect charge. If, however, one line is not enough to take all of the calls or if you wish a second line to transmit and receive telefaxes, it will cost you a minimum of to connect the line. Any inside installation is extra. Local phone companies bill their inside installation time at /hour.
Consider also your needs for: phone message handling, cans made outside of your office and paging. An answering machine may be sufficient to handle calls when you are not in. But perhaps you feel that your customers demand a real live person to answer your phone. This increases your start-up costs to hire a receptionist or a live answering service, which charge around /month. Special phone features, such as call waiting, call forwarding or caller ID carry installation charges of – apiece. Keep an eye open for occasional deals that combine features for one, low cost.
Cellular phones often run over $ 1 00 to install and set-up and pagers often require a 0 deposit. These costs should be figured into your start-up cost estimates.
Licenses, Fees and Permits
Common start-up costs in this category include: assumed name registration fees, ranging from to , incorporation fees of $ 100 and up, business licenses starting at , health permits sometimes costing several hundred dollars, and state-issued licenses such cosmetology licenses, which can cost up to $ 1000 per year.
Insurance
If you are starting a typical home-based service business, your renters or homeowners insurance may cover your business equipment, supplies and inventory. But it may not, so be cautious and call your home insurance agent before you open for business to check the policy coverage. Often a small additional fee, known as a rider, will increase your home insurance to cover equipment such as a business computer, telephone and fax machine. If you need a rider, figure on adding to your start-up costs.
Stationery
To promote a professional, established image for your business, have well-designed and printed letterhead, envelopes and business cards done. Quick printers and office supply warehouse stores, such as Office Max and Office Depot, offer very attractive prices on packages. For example, Office Max in Chicago offers 500 letterhead, 500 envelopes, 500 business cards and 200 invoices for .95. You have limited ink colors, paper styles and typefaces to choose from, but this type of package can start you off with a sharp look to your business.
Recently introduced are software programs that present miniature outlines of letterhead, envelopes, business cards, brochures, etc. on your computer screen to guide you in inserting your own selling text. The paper is pre-printed with 34 colors at the factory and you add the black text on your computer printer.
Professional Fees
If your are considering incorporating your business, need contract forms setup, will deal with import/export, want to set up distributors or require any other legal guidance, you had better budget 5-7 hours of a lawyers time. Good business attorneys charge between and 5 per hour, so you would need to set aside 0 to $ 1 000 in start-up investment for legal help.
If you are going to open a retail store, a wholesale company or a manufacturing company you would be wise to consult an accountant before you launch. The accounting systems to support these types of businesses can be complicated. You can expect yourself to understand all of the details. Better yet, budget 0- 00 in start-up investment to cover accountant’s fees.
Promotional Costs
The previous start-up expense categories discussed in this article are important to prepare the operation of your new company. The last category, promotional costs, includes investments in gaining critically important sales for your new venture.
We recommend, at a minimum, that you invest in designing, printing and mailing of flyer to announce that you are in business, what you offer, where you will offer it and how to get hold of you. If you are experienced in using a word processing or desktop publishing program, you can design, layout and typeset your own flyer. Taking the original copy to a photocopy store and having several hundred run on eye-catching paper will cost you- less then . Add in – for postage and you will have your initial promotion underway.
You can, of course, plan and execute much more elaborate initial promotion, everything from a grand opening party for your retail store to a 10-city seminar series for your consulting company. Budgets for this type of promotion can run well over ,000. The key to successful cash management here is to plan ahead. Allow 2-3 months before your official opening to research promotional alternatives and their costs.
Summing It Up
When you total up all of the categories of start-up expense, you may be amazed at the total. If you include a computer, start-up costs can easily run over 00, without any cash contribution toward your personal living expenses. Advance planning is the key, because you should try to avoid borrowing the money to pay start-up costs. You will need to borrow later to stay in business. Borrowing before you start puts you in the credit hole before you have started to market your company.
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