The title of this article may be misleading. It is really about planning, budgeting and cash -- having a business plan that works.
It is extremely common for an entrepreneur to author a new business plan with what seems to be good financials, including a table of start-up costs, only to find out that on day-one they need many more unbudgeted items to open and, worse yet, are out of cash. I have reviewed hundreds of business plans and have never seen a complete start-up cost budget. They are all 20-100% short of what is going to be actually needed to open and have sufficient opening operating capital.
The core things that need to be included in a start-up budget are...
- initial inventory
- salaries and
- marketing costs
- legal/accounting fees
Let’s isolate a few of these, for example, utilities. In addition to monthly billing and usage fees did you include the required deposits?
Does your insurance quote include not only liability, but workers compensation and possible bonding for employees? Will you do background and drug checks on employees and is that cost included?
Recently, two entrepreneurs came to SCORE with a good and well-thought-out business plan and table of start-up expenses. The total budgeted amount of start-up costs was about $72,000 and they were pretty sure they could open with that. We suggested they go to three similar businesses and observe in detail everything in it.
For example, If there are restrooms think about what’s in them. Have you included toilet paper, paper towels, soap, cleaning supplies and trash cans? The state and federal governments require certain signs be posted in employee areas, are they in the budget? After the visits, they increased their own budget in excess of $30,000, or about 50% more. And even then, they did not include capital in the budget to carry them over once they opened and to cover costs until customers found them.
So I ask you, is there toilet paper in your budget?