It is important to create a business plan before hitting the ground. This plan helps you to answer critical questions like the money you need to start your venture. If you fail to address proper startup cost for business, chances are high that your business might end up failing even though it started strong. Having educated idea revolving around startup cost can easily benefit business more than just having a basic plan and facing unforeseen expenses. The key over here is to look at business based expenses as individualized components.
Start listing money spend on assets:
Your business assets are important to use over a long term. Whether you are making or just selling products, think about inventory you need at the start. If you are starting new service business for example, then you don’t have to worry about inventory. You can easily skip this part. Everything your business needs for functioning properly can make up starting assets. Some people might even think the business money saved in a bank as another major asset to be listed out there.
Timing is important:
Some people are rather confused by the specified definition of startup prices, financing ,and startup assets. They might prefer having generic and much broader definition, which includes expenses used during first year or first few months. But, this step might lead to double counting of non-standard financial statements and expenses. The expenses as incurred during the first year have to be added in Profit and Loss statement of the first year. The expenses before that should appear as startup money.
Avoid counting expenses twice. The only difference between startup money and profit and loss is timing. Similarly, avoid buying same asset twice. These items then might go into startup if you purchase them before starting date. Otherwise, those assets might be listed under Profit and Loss list.
Listing spending as based on expenses:
Not everything you land on can be an asset. You might have to spend some money on expenses too. Let’s take an example for better understanding. It takes some money for setting up Legal Corporation, partnership or LLC. The money you need to spend on creating a website, costs of fixing up office and even salaries you need to pay employees are some additional examples of expenses. You have to include expenses for office equipment, like computers and more. After listing out the expenses, add that with your starting asset for calculating major part of starting costs.
Money you need to get started:
You need to realize the amount of cash you need in bank for early months when startup venture is ramping up and not generating your expected sales for covering expenses and business costs. There are various ways to perform this task. According to some people, you need enough money for covering six months of office expenses and for others, it is a year.
However, the main suggestion in this regard is to establish first 1 year of sales, expenses and cost of sales. You will end up with list of 12 months with costs, estimated sales and expenses for each month separately. After that, subtract costs and expenses from sales of each month and the result will determine if you are short of cash or not.
Avoid capitalizing expenses:
There are some times when people might treat expenses as assets. It is not a good idea at all and for various reasons. The money spent while buying assets is not tax deductible. On the other hand, money spent on expenses is termed as deductible. Furthermore, capitalizing expenses might create danger of overstating assets. If you try capitalizing expenses, it will appear as asset. Adding useless assets on accounting book is not a clever step to take.
Going through types of startup finance:
Before you head towards start-up costs for your business, you might learn about types of financing options available.
- The first one is investment, which you or someone you know might put into company. It works as paid-in money in Balance sheet. This is a classic investment concept of business, with you taking your firm’s ownership and risking some more money in hope of great revenue.
- Current borrowing is another type of startup financing. It is a standard debt s borrowed from banks or even from small business administration.
- Then you have accounts payable in the list. These payables are debts ending up as Accounts Payable in balance sheet. It is also described as credit-card debt. This number will be starting balance of your sheet.
- Some of the additional liabilities with no interest charges are known as other current liabilities. Here you put loans from friends, founders or family members.
Just focus on the types of financing and the proper plans for designing perfect start-up costs for businesses. It might take some time initially, but all worth it in the end.
George Dille is an Expert in Business at BusinessVenturesIndia Ltd, a company that provides Pvt Ltd company registration services in a convenient manner. He is a passionate writer and loves to share Business tutorials.