Estimating Costs is a Critical step to Starting a new Business

Entrepreneurs Beware: Many companies fail due to lack of financial planning

(EMAILWIRE.COM, March 16, 2008 ) Suwanne, GA -- How much financing is needed for the company? What is the repayment period? These questions need to be answered in order to determine the amount of financing required. In order to do this, business owners will need to know the costs incurred and the estimated revenue as well as their cash flow circumstances at least for the first few months of operations. Apart from that, one will also need to determine the amount that required start a business. For example, how much is required for purchasing assets such as equipment, furniture and remodeling costs, starting inventory, and rental and utility deposits. Furthermore, they will also need to pay for incorporation fees, insurance and licenses. The best way to determine start-up costs would be to obtain an estimate of these costs from vendors who are selling the equipment.

This can be done by requesting a list of quotes and specifications, to get a good gauge on the amount needed. The same process goes in obtaining prices for inventory supplies. As for rental and utility deposits, one can get the help of a realtor to determine the amount required for the 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 is a good idea to make an estimate of 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 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 is also a good idea to estimate personal expenses up to a period of 90 days to know the costs needed for the start-up phase. This way, one is prepared with adequate savings to support themselves and their 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 cost estimation. This document can then be used to accompany the 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 an application and make a decision on the approval.

Other than that, one can also utilize the table for their own business planning purposes, or evaluation purposes after the initial 90 days of operations. This makes planning the next operating period of the business much easier, and planning the future more precise.

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