8.0 Startup Expenses and Capitalization
You will have many expenses before you even begin
operating your business. It’s important to estimate these expenses accurately
and then to plan where you will get sufficient capital. This is a research
project, and the more thorough your research efforts, the less chance that you
will leave out important expenses or underestimate them.
Even with the best of research, however, opening a
new business has a way of costing more than you anticipate. There are two ways
to make allowances for surprise expenses. The first is to add a little “padding”
to each item in the budget. The problem with that approach, however, is that it
destroys the accuracy of your carefully wrought plan. The second approach is to
add a separate line item, called contingencies, to account for the
unforeseeable. This is the approach we recommend.
Talk to others who have started similar businesses
to get a good idea of how much to allow for contingencies. If you cannot get
good information, we recommend a rule of thumb that contingencies should equal
at least 20 percent of the total of all other start-up expenses.
Explain your research and how you arrived at your
forecasts of expenses. Give sources, amounts, and terms of proposed loans. Also
explain in detail how much will be contributed by each investor and what
percent ownership each will have.