Start Up Expenses for a Business
Start up expenses are the costs which you need to spend to get the new business up and running, ready to start producing and selling goods and services.
What you define as start up expenses is completely a matter of opinion. Some costs are clearly one off start up expenses for example legal fees to obtain a lease on new premises. Other costs are not so well defined, for example initial printing and stationary costs might be defined as start up expenses, but at some point printing and stationery becomes a normal day to day trading expense.
The point of estimating start up expenses is not to categorize costs, but to get an idea of what losses your business is likely to incur before actually starting to trade and more importantly what cash and funding will be required to pay for the losses before generating any income.
All businesses are different, but typically start up business expenses include some of the following:
- Computer costs
- Legal fees
- Logo design
- Licenses and fees
- Accounting fees
- Bank fees
- Payroll expenses
- Office supplies
- Vehicle expenses
- Association fees
- Website design
Start Up Expenses in the Financial Projection
Having estimated business start up expenses, they need to be included in the financial projections template. How they are included depends on whether they occur before or after the date the financial projection is started.
We usually recommend business startup expenses are estimated and included in the start up costs calculator under the heading of expenses. This start up expenses template also deals with start up assets and funding, and provides an opening balance sheet for inclusion in the financial projections template. Having been spent before the start of the plan the start up expenses included here will form the opening losses of the business, and be included in the opening balance sheet as a negative figure under retained profits.
There is however, nothing to stop you starting the financial projection on day one before incurring any costs, with a zero opening balance sheet and including all the startup business expenses under the appropriate headings in the income statement for year one.
Start up expenses forecasting is an art not a science, no one expects you to be able to predict the future, you are making educated guesses based on the information you have available to give a realistic estimate of what you think the start up expenses to fund will be. Avoid wishful thinking, (add 10-20% to the figure you first thought of), and avoid too much detail in analyzing the types of start up expenses you have.
Remember, the main aim of this task is to estimate the total expenses needed to get the business of the ground and to make sure you have the required funding to pay for them before you start. Whether they are included in the financial projection as part of the opening balance sheet or as year one expenses is a secondary issue.
What’s the Next Step?
The next step in producing a five year financial projection for your business plan using our financial projections template is to estimate startup assets, which form part of the startup costs.
This is part of the How to Create Financial Projections Guide a series of posts on how our template is used to produce simple financial projections for a business plan.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Plan Projections. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.