The is the eighth article in a series of posts focused on deconstructing the essential elements of creating a Business Plan.
Business Planning Articles:
Startup Expenses & Capitalization
The eighth section of the business plan involves outlining all of the expenses associated with initiating the full time operations of your business.
This section of your business plan should be thorough, between 1-2 pages in length.
The purpose of this section is to inform the reader of all the resources your company requires will require to initiate it’s operating. The total cost of the resources you plan to leverage represents the required capitalization to launch your business.
Therefore, the startup expenses represents a list of individual items, while the capitalization represents the total required investment.
Depending on the stage of your startup, the Startup Expenses & Capitalization section can represent either the investment already put into launching the business, or the required investment to launch full time operations.
Practically speaking this section is very straightforward.
Entrepreneurs should very plainly list all of their startup expenses, their associated costs, and their the total. Including brief explanations for unusual items and/or capital intensive or expensive items should be considered.
Sample Startup Expenses & Capitalization Budget
The sample budget represents common startup expenses for a mobile technology startup. The budget covers the initial expenses over a 3 month period, with educated estimates for individual item costs.
When examining the example above, it is important to keep in mind that every business will have different kinds of startup costs depending on the type of the business, the industry it operates in and the scope of the venture.
Think carefully about all of the required items to launch your business, research what the costs are and keep a record of it in an excel spreadsheet.
While this section is straightforward, it is very important that your expense estimates are accurate, and clearly linked to the details and economic values in the following Valuation & Ask section of your Business Plan.
Tabulating startup expenses accurately demands thorough research, and entrepreneurs should do everything they can to avoid underestimating their initial expenses.
Nevertheless, entrepreneurs, through no fault of their own, have a tendency to underestimate their initial startup costs.
The reality is that unforeseen expenses always emerge, and planning for them appropriately is important.
To account for this, entrepreneurs can adopt two methods to account to probably & unforeseen expenses; padding and contingency.
Padding represents increasing the cost of each startup expense item in your budget by a determined percentage. While this strategy allows for anticipating higher or additional costs to your start-up items, its weakness is that the method erodes the accuracy of your carefully tabulated budget.
Contingency represents creating a separate line item, called Contingencies, to account for possible unforeseen expenses. The line item can be calculated by adding a percentage of your total expenses on top of your startup’s total costs.
This approach is more common. It more accurately reflects your required expenses and demonstrates that your team is aware of the likelihood that your business’s startup expenses will be higher than you initially anticipate.
The best way to determine the appropriate contingency percentage to add onto your total expenses is to ask other entrepreneurs what they allocated for their contingency, or by studying common industry standards.
A general rule of thumb is that your allocation for contingencies should equal approximately 20% of your total startup expenses.
Entrepreneurs should keep in mind that the startup expenses and capitalization section of your business plan is very closely tied to the Valuation & Ask section as well as the Financial Plan.
The challenge, therefore, is to make sure that not only is the information provided in this section accurate, but that it complements the subsequent sections of your business plan.
A good startup & capitalization section should simply inform the reader in simple economic terms, and not raise questions or produce uncertainty.
Lastly, significant expenses should be properly explained and sourced so that the reader can verify your proposed amounts.
For unusual items that may be hard to understand, consider including detailed explanations in the Appendixes of your Business Plan.
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