Estimating Costs

Estimating Costs

How much financing do you need for your company? What is the repayment period that you intend to work with? These questions need to be answered in order to determine the amount of financing to be obtained. In order to do this, you will need to know the costs incurred and the estimated revenue as well as your cash flow circumstances at least for the first few months of operations. Apart from that, you will also need to determine the amount that is needed to start your business. You will probably need to purchase assets such as equipment, furniture and remodeling costs, pay for your starting inventory, and have enough for rental and utility deposits. Furthermore, you will also need to pay for incorporation fees, insurance and licenses.

The best way to determine your start-up costs would be to obtain an estimation of these costs from vendors providing that will be selling the equipment to you. This can be done by requesting for a list of quotations and specifications to get a good gauge on the amount that you will be spending for this. The same process goes in obtaining prices for your inventory supplies. As for rental and utility deposits, you can get the help of a realtor to advise you on the amount that is required for your new premises.

It is good to know that the start-up costs for each business varies according to the nature of the business. A service-type business will naturally incur less or no inventory costs as opposed to a products-based business. Also, the business owner may decide to start on a shoestring budget and thus will just work on a low-cost basis, requiring only bare essentials during the first few months of operations.

Apart from looking at the start-up costs, operating costs at least for the first 90 days should also be budgeted. This would include variable expenditure such as rentals, salaries, commissions, utilities and inventory replenishment. It would be good as well to make an estimate on the expected revenue and collections within this period of time, and develop a 90-day budget on the cash in-flow and out-flow. It is also best to keep the estimates conservative, just in case things do not happen as planned. With a keen eye on the cash-flow, any shortfall can be detected which will determine the amount of cash financing that is required.

It is often a good idea to allow some buffer during the forecast and budgeting process for contingency purposes in case calculations were incorrect. On a personal basis, it would also be a good idea for you to estimate your personal expenses up to a period of 90 days as well, so that you’ll know the costs that you need to bear during the start-up phase. This way, you will be prepared with adequate savings to support you and your family during this critical phase.

It may also be a good idea to develop a professionally-looking table or spreadsheet to highlight the details of your cost estimation. This document can then be used to accompany your proposal to lenders or venture capitalists for the purpose of obtaining financing for the business. This way, it will be easier on the decision maker to consider your application and make a decision on the approval.

By  John Hester

Try Shopify for free
Comments are closed.