How to Start a Business

Estimating Startup Costs

Written by Richard San Juan for Gaebler Ventures

Anytime someone wants to start a business, they are usually in the red, because they have to first spend money before they open for business and become fully operational. Estimating startup costs is an essential step, because if done the wrong way, the company might be dead in the water even before opening its doors. Entrepreneurs must understand important of not underestimating costs.

When people usually talk about startups, they always talk about the exciting idea behind the company or the vision of what the company can accomplish down the road.

Sometimes overlooked and underestimated are the costs needed to jumpstart the entrepreneurial venture.

One thing most entrepreneurs do is confuse the definitions of startup expenses and startup assets.

Startup expenses are expenses that happen before the planning stage. Some examples include legal work, site selection, logo design, and brochures.

Startup assets, on the other hand, are cash at the time the company starts and starting inventory. Such items include equipment, machinery, and other office necessities.

Small business owners and entrepreneurs should be careful not to double count expenses and double buy assets. Otherwise, the accounting of your small business or startup will be problematic.

When counting expenses, one should remember that all the expenses that happened during the first year should go in the Profit and Loss statement of that first year, and all expenses incurred before the first year are classified as startup expenses. Regarding startup assets, distinguishing which statement it should go to will help avoid the mistake of buying assets twice. To summarize it simply, do not count assets and expenses twice: it either goes in Startup or Profit and Loss, but not both statements.

Startup Financing

When discussing startup financing, we are referring mostly to loans and capital investments.

There are various types of startup financing that should be known to the entrepreneur or small business owner.

One type is simply regular investments by regular people and investors into the company. The company then usually gives out shares signifying that they have some ownership in the company.

People invest in the company hoping to reap a higher return in the future than what they put in.

Another type of financing that an entrepreneur must be aware of is current borrowing. Current borrowing is basically borrowing from banks or the getting loans guaranteed by the Small Business Administration. This is what is referred to as standard debt.

Any startup financing done by the company or small business using a credit card will end up as Accounts Payable on the balance sheet and becomes the starting balance.

This type of financing typically takes care of the office supplies, furniture, and utility payments. Current liabilities is financing that uses interest-free loans. One might ask who is going to loan money to an entrepreneur or small business owner without getting major interest back from the loan?

Not many. In order to get a startup loan, it's best to tap people you know. Loans from the founder, family members, relatives, and friends are sometimes interest-free.

Richard San Juan is currently pursuing an MBA degree with an emphasis in Finance from DePaul University in Chicago. He is particularly interested in writing about business news and strategies.

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We welcome your comments on estimating startup costs.

  • Sarah posted on 3/18/2009
    I way underestimated some of my starting costs when I started my business last year, and I just have a home business. I ended up having to cut down on some things and add more on others. The recession has given me incentive to make some good changes that are good for my business.

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