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

 

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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 break

Go 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 money

Add 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 more

Now 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 Costs

Take 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 Estimate Final 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.

 

 

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