Start and Maintain a Business
Expenses to Consider, Implications of the Financial Forecast
Mar 3, 2009
Starting a own business may be an option worth exploring. However, be careful to forecast potential expenses to be certain it can be profitably maintained
Owning a own business can be exciting and satisfying. The cost of starting a new business, buying an existing business, taking out loans, and applying for licenses are among the start-up costs. But before jumping in, spend plenty of time projecting the cost of maintaining the business. How much income will be needed to meet expenses and make a profit?
Expenses vary according to the type of business. However, many of the categories of expense will be the same.
Types of Expenses
- Cost of Goods – If manufacturing, buying products to resell, or selling your service, consider how many units of goods or service can be made, stored, or provided and how often it will be necessary to buy more inventory. In general, the cost of goods is one-half of the amount customers are charged (retail price). For example, if an item costs $2, charge customers $4. State, province, and local municipality sales tax may need to be added. Check for local tax rates with local government offices. An investment in small business management software can help with these tasks.
- Salaries – Hiring others to work in the business? If the business is in the United States, compute salary as well as the cost of such things as Social Security, Medicare, Federal income tax withholding, and Federal unemployment taxes paid as a percent of their earnings. In general, double the hourly wage to get an idea of the expense per employee in salary, tax, training, and incidentals. If employing more than 10 people, consider the costs of adding health insurance as a benefit in order to attract and retain good employees. This is expensive, but may be worth it in the long run so that more will not have to be spent advertising for, interviewing, and training new employees. Remember that the owner has to pay taxes on his or her earnings, including self-employment taxes. In the United States, the IRS reviews business taxes on their website.
- Rent – Small business owners often lease space in a shopping area. The cost varies but generally runs between $10 and $20 per square foot. For example, a 1,000 square foot space might cost $12 per square foot or $12,000 per year. Rent is usually paid monthly, so would be $1,200 per month in this example. Utilities such as water and electricity may be separate. Read lease agreements carefully for information about leasor responsibility for fees associated with the building exterior or parking lot maintenance.
- Loan – If a loan is taken out to buy an existing business or franchise, add its repayment to the monthly projection of expenses.
- Advertising – A rule of thumb is to set aside 1 to 2 percent of annual sales for advertising. To lower expenses, consider using as many different forms of marketing and public relations as possible, ask customers how they heard about the business, and hone in on the marketing methods that attract the most customers.
- Office Expenses – Software, envelopes, stamps, cleaning supplies, seasonal decorations, cash register paper, business cards, pens, and more will be needed. While expenses can vary, don’t shortchange here. It is important to project long-run confidence and professionalism.
- Telephone and Internet – A phone and Internet connect generally cost about $75 per month. The number of connections and add-on services can increase this.
- Bank Fees – The bank fee for a credit card machine is about 2 percent per transaction or less. Ask if there is a fee for leasing the machine. Also ask the bank for a schedule of other charges for business services.
- Professional Services – Paying an accountant to complete your payroll and taxes? Need an attorney to review your lease? Consider including $100 to $200 per month for such services. There are small business management software tools that can help you cut down on these costs by performing some tasks yourself.
Ask friends who own businesses and consult neighboring business owners if they can think of any other expenses.
Project Expenses against Income
Once satisfied that a good extimate of the expenses has been made, figure how much must be sold in order to break even. Project sales at different levels to see how much income is needed to cover expenses and sustain a preferred lifestyle.
The copyright of the article Start and Maintain a Business in Small/Home Business is owned by Sara E. Lewis. Permission to republish Start and Maintain a Business in print or online must be granted by the author in writing.
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