Run a cost analysis for your business as you start it up: Part 8 of the Smart and Simple Guide to Starting a Business

8 minute read

 

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[This article is a piece of part 8 of our Smart and Simple Guide to Starting a Business – scroll to the end to see the other parts]

 

Before you get stuck into working through this guide in earnest, take the time to read the companion article about costs and suppliers here. You should also read through the resources we have put together to give you more background.

Time to get stuck in.

Step One: List out you costs – all of them.This is the single most important thing you are going to do, because at this stage – before you have committed to anything – it is the way to stave off future financial problems by getting out ahead of them. So take you time and try to think of everything. You can copy the table at the end of this article and past it into a spreadsheet as a starting point.Break your costs up two ways (or more if that helps you) – at the very least into fixed and variable costs. These are the one-off costs that you need starting up, like a lease on a location, compared with the variable costs associated with the ongoing operation of your business, such as the cost of the materials or supplies that you are going to sell. If it helps, lay them all out in a timeline as well, since many people are task oriented and it helps to walk through the different stages you already have in your head for starting your business. Write EVERYTHING down in an organized fashion or add it to the spreadsheet you are building.Here is a summary of common areas the people tend to think about when laying out costs.Fixed costs

  • Business premises (rental, leasing, utilities, etc.)
  • Additional location costs (redecorating, fixing things, fittings and fitments, furniture, parking, etc.)
  • Location dependent costs like broadband, phones, etc.
  • Taxes and financing for the location – any additional costs associated with loan payments or taxes to do with the location
  • Equipment including things like vehicles, forklifts, cooking equipment, office equipment, etc.
  • Fees for services associated with starting up (company formation, legal fees, tax fees, etc.)
  • Online costs for a website, marketing materials and collateral, etc.
  • Insurance – in this case just insurance for the things listed so far under fixed costs.

Variable Costs

  • Costs of materials – the raw materials for your products – try to cost this out two ways once – is what your overall cost per month will be – the other and more important is the precise cost to make one unit of product so that you can tell exactly how much you should make per unit sale.
  • Cost of production part one – wages, taxes, health insurance, any other ongoing costs for staff – do not forget to include your own salary – or whatever you plan to take out of the business.
  • Cost of production part two – cost of machinery, tools, supplies needed for production that are not part of the product itself (things as simple as equipment cleaning supplies).
  • Storage – it is possible that if you are making or shipping goods that you will need to store them – that’s another variable cost.
  • Shipping – the cost of delivering your good or service
  • Other transportation – if yours is a service business you may have to be places (or your staff will) and there is a cost to getting there that varies every time
  • If you are billing out time as a service then there are portions of your fixed costs that can be attributed back to your customer and should then be treated as variable costs that are time-related (if you choose to do that).

Step Two – Redo your list again after a breakGo over the list again really thoroughly and add more (trust me – you will think of some). This may seem redundant but it is actually an important separate step – you need a little time and distance to reflect and look at your list of costs with fresh eyes or you will just see the same things.Take the opportunity to categorize or organize the costs in a way that makes sense to you (eg. Location-related, personnel-related, etc.) But whatever you do keep them firmly separated into fixed and variable. You need to use fixed and variable costs properly to budget and manage your cost structure against revenue to understand how to make a profit.  Now that you have categorized your costs, look at the categories and think about categories you might have missed.Step Three – Show the moneyAdd a dollar value to every single one of these costs. Be realistic – do not make assumptions about being able to get discounts or costs dropping as volume rises – those only get counted when you KNOW you have received them. Now take a very hard and realistic look at these costs. Set up a spreadsheet for the first year of business with all the fixed costs across the top and variable costs in a separate section below where they can be linked to volume. Plan these costs out over the year. Again be realistic – make NO assumptions of success.Step Four – Cut to the bone and then a bit moreNow comes one of the hard parts. Cut out everything you really do not need. Everything. Look at all your costs and think about if you really need to spend the money. Don’t be foolish about it – don’t remove costs you really will have to spend – but also do take out things that you know you can get by without. Some businesses make do without things like letterhead and business cards initially for example. Think about the fact that every penny saved here is a penny added to your potential profit. And also think about the risk of cutting out things that will affect your ability to actually deliver to your customers.Step Five – Real World CostsTake another break. These breaks are important because they let your brain reset and see the problem in a new way. When you come back look again for what you have forgotten that are going to be real costs. Add them in. By now you have gone over your costs at least three times. You are finally understanding them and they are sinking in – that’s good because you need to know them instinctively. Now that you have a full list of costs it is time to research the costs for real and any savings you can make. Read the other supporting articles and note especially the tips and tricks for saving money. Start to put REAL numbers against your costs. Get costs as close to reality as you can. By now you have looked at your costs enough to understand how important each of them is going to be toward your business so you can make smarter decisions about the levels and amount of spending you are prepared to make. This is one of the most painful and difficult exercises for a prospective business owner because this is where you finally begin to learn if you really have a viable business. If you can’t get the costs down to where you can make money then you are in trouble. If after this exercise you are in trouble don’t despair yet. Give it a day or two and go back and see what else you can save and do without. But after that – if you can’t make the numbers work – WALK AWAY! You need to find a different business.Hopefully instead you have a model that CAN work. Now you know your target and the amount of revenue you need in order to cover your costs.

 

COSTS    Initial EstimateFinal Monthly Estimate
Fixed Costs     
       
 Premises Rental    
 Premises Down Payment or Deposit  
 Premises Fees    
 Utility Connection Fees   
 Utility Deposits    
 Premises Repair and Remodelling   
 Premises Decoration    
 Premises Furniture    
 Premises Equipment    
 Broadband Deposit, Equipment Costs  
 Phone Deposit, Equipment Costs   
 Office Equipment Deposit/Lease Fees  
 Office Equpipment Purchase   
 Manufacturing Equipment Deposit/Fees  
 Manufacturing Equipment Lease   
 Manufacturing Equipment Purchase  
 Vehicle Lease    
 Vehicle Deposit and Fees   
 Vehicle Purchase    
 Point of Sale Deposit and Equipment  
 Point of Sale Purchase    
 Locks, Security Equipment Purchase  
 Security Service Deposit and Fees   
 Signage     
 Local and State Fees and Permits   
 Business Permit    
 DBA and Business Structure Fees   
 Sales Tax Initial Fees and Payments   
 Franchise Fees    
 Legal Fees     
 Accountant/Bookkeeping fees   
 Insurance Startup Fees    
 Domain Name Fees    
 Web Hosting Fees    
 Website Setup Costs    
 Ecommerce and Online Sales Setup  
 Online Marketing Materials Costs   
 Stationary and Marketing Collateral  
 Other      
       
 Total Fixed Costs    
       
       
Variable Costs     
       
 Cost of Raw Materials    
 Cost of Inventory    
 Wages     
 Taxes on Wages    
 Health Insurance    
 Other Insurance    
 Uniforms     
 Your Salary    
 Cost of Other Supplies Needed to Supply Goods 
 Cost of Wear and Tear    
 Storage Costs    
 Shipping Costs    
 Other Ongoing Transportation Costs  
 Monthly Insurance Premiums   
 Monthly Equipment Lease Payments  
 Monthly Premises Lease Payments   
 Monthly Utility Bills    
 Monthly Broadband Bills   
 Monthly Telephone Bills   
 Monthly Loan Repayments and Fees  
 Monthly Accounting Costs   
 Costs for Merchant Services   
 Monthly Legal Fees    
 Monthly Security Fees    
 Office Supplies    
       
 Total Monthly Costs    
       
Total Costs     
       

 

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Part eight of a series – The Yahoo Smart and Simple Guide to Starting a Business.