Monday, January 26, 2015

5 Tips to set a true-cost operating budget for your start-up.

Most lenders, investors and even grantors require some sort of business plan when considering whether to invest in a start-up. One of the first things they look at is your cost of doing business projections. If they find that part lacking, they seldom look further.
When I'm working on a business plan for a new enterprise, whether nonprofit or for-profit, most of the initial budgets I see fail to include some fairly non-negotiable costs. Here are some areas to consider.

1. Government-required payments
Almost without fail, one area that trips up a lot of new business owners is the amount they have to include for what I call government and legal compliance costs.

Some people do include the FICA costs, i.e. the 7.53% of payroll that the employer must remit to the Feds, but fail to include costs for state and Federal unemployment assessments, workman's compensation premium payments, local taxes and licensing, liability insurance, and any professional association fees or licenses that are beneficial to or required for the business. Also, new costs associated with new laws like the ACA many factor in as well.

2. Advertising and marketing
Another often under-estimated cost is advertising. There is a prevailing attitude that everything can be done online, and it's free. No matter how wide-ranging your business plans are, all businesses have a local component, and this is particularly true for nonprofits or small retailers.

Revving up local interest can be expensive.

Websites and domains cost money. One of the popular web hosting sites that advertises ".99 cent" websites has initial start-up costs for the domain and the initial website hosting starting at around $75.00/yr for a completely static site. Add any sort of customer interaction (blog, email sign-up, mobile friendly,  etc) , and the price can triple.

As great as it is, the internet isn't a foolproof business growth tool. Running a few spots on the radio, a 15-second spot during your local news program, or utilizing any other form of "traditional" advertising avenues may be necessary just to drive traffic to your site or social media page.

3. Legal or professional costs
Sure, you may be able to get some sort of generic business document template and file it for a few dollars, but that's just the start. All states have specific documents, i.e. non-discrimination clauses, by-laws, and a multitude of other things that you may need the help of an attorney or other professional to complete or at least explain.

4. Wages
Believe it or not, you won't be able to "do it all" for very long. Even nonprofits usually find themselves at the point of needing at least one employee that they can count on being where they are supposed to be when they're supposed to be there.

5. Daily expenses
Things like utilities, phones, office supplies and equipment aren't free. Even donated equipment has to be maintained and replaced when it breaks. Having an allowance for these items is not optional.

Almost without exception, when I am working on a business plan for a client I find that they need to increase their annual cost projections by 25-40%, and that naturally affects the amount of revenue they need to break even as well.

Are your cost projections reasonable?  If you'd like a review, drop me a line at and we can discuss them. 

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