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Estimate cost of startup carefully

August 27, 2012

Before fast-tracking to business ownership, take a moment to realistically analyze all of the costs you can expect. Some of the costs may surprise you…

SAN ANGELO, Texas — Small businesses spend money before they open.

Startup expenses are incurred before the business is up and running. Many small business owners underestimate startup costs and start their business without proper planning.

A startup cost worksheet is suggested to plan your initial financing. This information will help set up initial balances and to estimate startup expenses. Be very careful to not underestimate costs.

Startup expenses are expenses that happen before you open your business. Here are some examples: inventory, marketing, improvements and signage.

I would also recommend determining your startup assets; such as cash. This would be the money you have in the bank when the business starts. If you are a retailer you will need to find out how much inventory you will need to open the business. Other assets include equipment, office furniture and machinery.

Most potential small-business owners will need financing to start their venture. This would include capital investment and loans.

The only amounts that belong in the startup checklist are those that happen before the business begins operating. Whatever happens during or after the first month should go into the cash flow of the business.

Some are confused as to the specific definition of startup costs. They prefer to have a broader definition such as expenses incurred during year one or the first few months. This leads to problems in record keeping. All expenses incurred during the first year need to appear on a profit and loss statement, and all expenses incurred before that are startup expenses.

When you are close to opening your small business consider what your cash balance should be. This is an estimate of how much money your business needs to have in its checking account. Your cash balance on start date is the money you raised from investors, lenders and cash you injected into the business, minus the cash you spend on expenses and assets.

After you open, consistently keep an eye on your cash flow projections. If your cash balance dips then you will need to increase your financing or reduce expenses. Many entrepreneurs try to raise more cash than they need so they will have enough money left over for contingencies. As good sense as that makes, it is hard to explain to investors and lenders. They typically are not willing to give you more than needed.

The advisers at the Small Business Development Center are familiar with helping entrepreneurs determine startup costs and cash flow projections. We would be happy to assist in any way.

“Business Tips” was written by Paul Howard, business development specialist and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact him at Paul.Howard@angelo.edu.

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    Paul Howard, Business Development Specialist and CBA IV

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  • Paul Howard

      Paul Howard

    Business Development Specialist, BBA, Certified Business Advisor IV
    paul.howard@angelo.edu

    Paul joined the SBDC in September 2005 as a Business Development Specialist with a specialization in family owned small businesses. Paul also holds a Certified Business Advisor III designation. Paul and his father owned and operated a locally owned business for 30 years. He holds a BBA in General Business from Angelo State University. Community projects involving Paul include previous membership in the Downtown Optimist Club and past President of the San Angelo Symphony Chorale. Paul has also served on the Board of Directors for the San Angelo Symphony.