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Start Business Costs
Start business costs How much is this going to cost? A VERY common question. Cost may be one of the big deterrents for starting a business, but not knowing the costs may be worse. Not knowing the cost is an invitation to spend, and lose, large sums of money. The best way to truly understand the your costs is to do a SHORT, but complete business plan
Link to planning to understand your start business costs
- First, it helps you to structure your thoughts, to get organized. - Secondly, because you’re organized you can now get to the financial nitty-gritty and KNOW, with a fair amount of certainty, exactly what the start business costs are going to be. - You want to avoid surprises. Surprises make you react. You want to execute your business plan, not panic because the money is out of control. Planning will help you determine the amount of revenue you’ll have to work with in the first year or two. It will also help you define your start business costs in major areas such as: - Manufacturing - Inventory/ Cost of good sold - Marketing - Payroll - Overhead Once you have completed your business plan and particularly your financial plan, you now need to step back and re-examine your costs. - Are there other costs you haven’t considered? - What if your revenue projections are too optimistic…how much of the costs are fixed (you’ll have to pay them regardless of your sales) and how much will vary with your sales? Let’s consider these each one at a time. Are there other start business costs you haven’t considered? One way I use to make sure I truly understand the start business costs is to go to: Yahoo Finance: finance.yahoo.com/ (you can use any finance site). I look for companies that are similar to the one I am planning. These companies are going to be much larger than mine, but the cost categories will give me ideas for planning my own cost analysis. There might be an area I am forgetting, so an examination of another company is always helpful. For example let’s say my company is DK Designs and I’m in the jewelry business. Research leads me to House of Taylor Jewelry Inc., the marketing company for Liz Taylor’s jewelry line. This is huge and I am tiny, but the information is vital. Using Yahoo I get this description of the company: House of Taylor Jewelry, Inc. engages in the design, manufacture, and sale of fine jewelry in the United States. The company markets its fine jewelry products under the Elizabeth, House of Taylor Jewelry, and Kathy Ireland Jewelry brands. It sells its products through specialty couture jewelry retailers, independent jewelry stores, and chain jewelry and department store retailers. I know this company is different from yours, but you can study it to find out what costs and financial issues it’s facing. Enter in the ticker symbol, HOTJ, and all of the financial information about this publicly traded company is before there. All public companies have to disclose their costs and a Yahoo offers comprehensive summary. Yahoo finance is a fantastic research tool and EASY to use! With some quick analysis, you find out that HOTJ is losing money. Why? It’s cost of goods sold is the problem. In other words HOTJ has a COST problem. Its main competitors have a gross profit (sales minus the cost of the jewelry) over 50% but HOTJ only has 13% gross profit. Using this information, I need to adjust my financial plan and MAKE SURE to price my jewelry to get at least 50% gross profit. Otherwise, I am going to LOSE money and always have a cost problem. Using the financial information of other companies similar to yours is HUGELY beneficial, because generally the problems they have are similar to problems you will be facing. Are your sales projections too optimistic? When you’re analyzing your start business costs, look at your first and second year revenue projections and see if they look achievable. Look at your costs and see how much of your cost is fixed (you’re going to spend it no matter what) and how much of the costs are variable (varies with your sales volume). Once you have that number, try to move costs from fixed to variable? Let’s say you decide to only hire employees based on sales volume; then your payroll becomes a variable cost (you’ll only spend it if you have sales) rather than a fixed cost. This is a cost strategy that many new businesses use successfully. Don’t spend money until you have sales/revenue. Furthermore, have most, if not all of your costs, variable rather than fixed. As I’ve mentioned before on this site, my husband and I had a magazine publishing business for ten years. The reason 99% of all magazines fail in the first year is because MOST of the costs are fixed. You have to print the magazine every month, even if you have NO advertising and few new subscriptions. Luckily most other businesses aren’t like the magazine business. You should be able to plan your cost based on your sales volume. Conclusion of start business costs One of your most important steps in launching a successful business is managing your costs. You may have everything else in place, but if your costs are a mystery, you’re in trouble. I’ve seen so many companies overspend in the beginning, or overspend as a little success comes their way. It’s so easy to overspend. Companies spend on beautiful office suites, expensive inventory that won’t sell for years, employees they don’t need, fancy sales and marketing brochures that go unused, company cars, the latest computers with all the bells and whistles, and a lot of other things that don’t drive sales. If it doesn’t drive sales, it will probably put you out of business. The most difficult part of being in your own business is managing costs. Try to only spend your precious resources AFTER you have the sales to support the expense. This all sounds very easy, but few businesses have the discipline to do it. My father-in-law gave my husband some good advice: “If you don’t have the money, don’t buy it.” Be careful and plan, plan, plan. To learn more about Costs and Accounting: CLICK HERE to learn the FUNDAMNETALS of Accounting 1
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