4 Necessary Steps to Calculate Your Business Costs?
Starting a new business is exciting, but it requires careful planning and a clear understanding of your business costs. Once you have an idea that you are passionate about and believe in, the next step is to figure out how much it will cost to bring that idea to life. This blog post will guide you through the process of calculating your business costs and understanding the level of sales you need to sustain your business. We’ll break it down into simple steps to make it easy to follow.
The Importance Of Assumptions
Calculating your business costs and potential sales involves making educated assumptions. Research is key here. You need to know what it will cost to start your business and how much you can potentially earn. Some expenses are one-time costs, while others are ongoing.
Steps to Calculate Business Costs
Let’s look at the steps involved in calculating your business costs.
Step | Description | Example Costs |
---|---|---|
Step 1: Calculating Business Expenses | This includes all the initial costs to set up your business. | Creating legal structure: $1000 Accountant: $500 Building out space: $2000 Licenses and permits: $300 Stationery and logos: $200 Marketing materials: $1000 First month’s rent and deposit: $1500 Insurance: $400 Telephone and utilities deposits: $300 Internet and website: $500 Other: $550 Total: $8250 |
Step 2: Purchasing Assets | These are the items you need to buy to start your business. | Furniture and fixtures: $3000 Equipment and machinery: $5000 Trucks and autos: $0 (if not needed) Inventory: $2000 Supplies: $500 Other: $300 Total: $10800 |
Step 3: Ongoing Monthly Expenses | These are your regular monthly costs. | Rent: $1500 Utilities: $300 Payroll: $4000 Owner’s draw: $2000 Supplies: $500 Insurance: $200 Transportation: $200 Shipping: $300 Legal and accounting: $200 Advertising and marketing: $500 Inventory: $1000 Taxes: $300 Debt repayment: $400 Working capital: $500 Other: $300 Total: $10500 |
Step 4: Calculating Monthly Sales | Determine how much you need to sell to break even and make a profit. | If monthly expenses are $10,500, you need to earn at least $10,500 in sales each month to break even. If an average sale is $50, you need to make 210 sales per month. |
Case Study Example: Jamie’s Juice Bar
Let’s apply these steps to a fictional business, Jamie’s Juice Bar.
Step 1: Calculating Business Expenses
- Creating legal structure: $1000
- Accountant: $500
- Building out space: $3000
- Licenses and permits: $200
- Stationery and logos: $300
- Marketing materials: $1000
- First month’s rent and deposit: $2000
- Insurance: $400
- Telephone and utilities deposits: $200
- Signs: $300
- Internet and website: $500
- Other: $300
Total: $9700
Step 2: Purchasing Assets
- Furniture and fixtures: $2000
- Equipment and machinery: $3000
- Inventory: $1500
- Supplies: $500
- Other: $200
Total: $7200
Step 3: Ongoing Monthly Expenses
- Rent: $1500
- Utilities: $200
- Payroll: $3500
- Owner’s draw: $1500
- Supplies: $300
- Insurance: $200
- Transportation: $100
- Shipping: $200
- Legal and accounting: $150
- Advertising and marketing: $400
- Inventory: $1000
- Taxes: $250
- Debt repayment: $300
- Working capital: $300
- Other: $200
Total: $9600
Step 4: Calculating Monthly Sales
If Jamie’s Juice Bar needs to cover $9600 in monthly expenses, they need to earn at least $9600 in sales each month to break even. If the average sale is $10, Jamie needs to make 960 sales per month.
Business Expenses and the Importance of Cash Flow
When starting your business, it’s crucial to be conservative with your spending. Business expenses can quickly add up, and as a new business, you may not have steady cash flow right away. Be smart with your money. Buy used equipment when possible, shop around for the best deals, and avoid unnecessary expenses. Business expenses will always be there, but managing them wisely can help you stay afloat during the early stages of your business.
Finding the Money
To get started, you might need to secure funding. This can come from personal savings, loans, or investors. Having a detailed business plan will help you present your idea to potential investors and lenders. The next steps in your journey will involve writing a winning business plan and seeking out funding sources.
Conclusion
Calculating your business costs is an essential step in starting a successful business. By understanding and planning for business expenses, you can better prepare for the financial challenges ahead. Remember to be conservative in your estimates and wise with your spending. With careful planning and a clear understanding of your costs, you can set your business on the path to success.
Read: How To Open A New Business: an A To Z Guide To Entrepreneurs