Martin Dunne of Sayers Butterworth chartered accountants explains how to work out how much starting a new business will cost
Firstly, you need to know whether you can afford to start your business. If not, then at least you'll know you need to explore other funding options. And if you’re going to seek money from investors – even friends and family – it’s better to do this once, because you’ll lose credibility if people find out you didn’t get your sums right. Secondly, you need to know the business idea is financially viable and your start-up costs are an important part of this equation.
If you underestimate your costs, your business will be less profitable than you expect. It might not even make any profit at all in the first year or two, which means you’ll have to arrange funding. The last thing you want to do is to invest your time and money in a business that will never give you the returns you’re after.
Yes, including some contingency money in your start-up and operating budget projections is wise – there are always unexpected expenses. Underestimating your costs can be just as disastrous as being overly optimistic with your sales forecasts.
Premises and associated costs, stock perhaps, IT and other equipment, maybe office furniture, business stationery and office supplies, marketing items such as leaflets or launch adverts, website development, postage, travel and transport, heat and light, phone and internet charges, insurance, professional fees, and not forgetting wages for you and any staff. The biggest operating costs are usually premises (rent and rates) and staff (wages, tax and National Insurance).
Stationery, utilities, business rates, insurance, professional fees, costs associated with moving into premises or doing them up and finance-related costs such as interest are all commonly neglected or underestimated.
Small costs can mount up, while the business should generate enough money to cover them – they shouldn’t come out of your pocket. We all want to minimise our tax bills, so include all amounts – no matter how small – in your accounts, provided these are allowable business expenses.
To claim tax relief (and VAT if applicable), you must have a valid (VAT) invoice and retain all sales receipts. If you make a claim for tax relief that cannot be supported by a valid invoice/receipt, HMRC can ask for the tax back, plus interest. Find out what you can claim for and make sure you retain proof of all business purchases.
You stand a better chance of making a profit – or even just surviving – in that crucial first year, because you need to turn over less to break even. Also, it’s a good discipline to get into from day one. In business, you must keep your costs as low as possible and avoid buying things you don’t need. Your chances of long-term success are much greater if you have a low cost-base – especially in the current economic climate.
Correct, your business might not even generate a livable wage for you. Just as I’d recommend including a generous contingency in your cost projections for the first 12 months, I’d also produce conservative revenue projections. What if sales in your first year are 25% less than expected – will the business still be profitable? Indeed, can you afford to carry on? Assume worst-case scenarios in your forecasts and then – if they happen – at least you’re prepared. If things pan out better, that’s a welcome bonus.
You might also like to read: