Start-up costs and Budget by huangyuarong


									 Pass 4 – Financial
•Produce a list of your start-up and running

 •Produce and explain the start-up budget
which includes details of the predicted costs
               and revenues
            Start-Up Costs
When a business launches a new product or service, they
need to budget for start-up and running costs. They will
need to estimate these costs in advance, to decide whether
or not the product or service will be profitable.

  Start-up costs are one-off costs paid before a new
  business is set up.

  Running costs are the costs
  involved once the service has
  been launched, in order for it to
  continue. These are payable for as
  long as the service is available.
     Examples of start-up
Examples of start-up costs include:
  new buildings for businesses,
  or extensions to accommodate
  expanding ones
  new machinery, vehicles or
  equipment (including installation and delivery costs)
  researching the target market for the new business
  initial advertising for the new business
  initial stock for the new business
  initial (first premium) payment towards insurance
  costs incurred through staff recruitment and training.
      Examples of running
Examples of running costs include:
  rent                         advertising
  wages/salaries               stock
  maintenance                  equipment
  loan repayments              stationery
  interest on loans            insurance payments
  communications               utilities
  (telephone, Internet, etc)   (electricity, gas, water, etc)
  mortgage repayments          travel expenses
                               (petrol, MOT, insurance, etc).
Start-up or running costs?
         Deep Fried Fred’s
                Start-up costs
                                                 Deep Fried Fred’s have
  Premises                 410,000               set a maximum budget of
  Cash registers (x3)          600
  Brand new delivery vans (x3)
                                                 £490,500 to cover start-up
  Refurbishment of shop      9,500               costs. The premises they
  Initial stock                500
  Initial advertising        2,000               originally had in mind for
  Fryers for cooking (x3)    9,600               their new shop cost
  Total start-up costs            469,700
                                                 £410,000. The bigger
  Budget                          490,500
                                                 premises are priced at
                               Spending = OK     £460,000.
The spreadsheet they have set up allows Deep Fried Fred’s to see
quickly and easily the effect on the total start-up costs of buying the
larger premises. It also allows them to assess where they might cut
costs in order to keep within budget.
         How might Deep Fried Fred’s buy the larger premises
                        whilst keeping within their budget?
                    My Start-Up Costs
Start-up Stock       I will have to buy …                         £1,000 -
Property Rent        I will be renting my property in … (name     £1,000 –
                     the street and town). I will have to make    £2,000
                     a “down payment”.
Equipment            I will have to buy fixtures and fittings     £4,000 –
                     such as …                                    £8,000
Advertising          I will need to inform local people that my   £500 –
                     …… shop is opening                           £1,500
Decoration of new    I will need to decorate the interior         £800 –
shop                                                              £2,000
Any other costs      I need some spare money available for        £500 –
                     unforeseen payments                          £2,000
BUDGETED             Are you under or over your budget?
                My Running Costs
Stock            I will have to top up my stock each          £100 - £750
                 month depending on demand. I intend to
                 spend £….. Each month
Property Rent    I will be renting my property in … (name     £500-1000
                 the street and town). I will have to make
                 monthly/weekly payments of £….
Utilities        Each month I will need to pay for Gas,       £50-150
                 Electric and Water.
Advertising      Each month I will need to spend an           £50 –
                 amount on advertising to tell people         £500
                 about my products and services.
Communication    I will have to pay for a phone line and an   £20 –
                 internet connection.                         £60
Insurance        I need to pay a monthly amount to cover      £50 –
                 my insurance for my business.                £150
    What can go wrong?
Sometimes initial estimates can be inaccurate, which often
results in the final costs for a project being much higher than
originally predicted. There are a number of reasons for this:

                      the original estimates were incorrect
                      the decision-making process took a
                      long time, and/or general delays in the
                      process increased the overall cost
                      inflation increased the overall cost
                      the business did not properly monitor
                      their costs.
Reducing my start     Benefits                                 Drawbacks
up budget option

Spend less on stock   Can still buy stock but at a cheaper     Cheap stock might be of a worse quality and
by finding a          price                                    therefore customers might not be happy with
cheaper supplier                                               product and might not come back therefore
                                                               lose customers and money
Spend less on rent    This is a big expense as it is a         The property might not be in as good a
by finding a          running cost as well as a start up       location so people won’t come = no money,
cheaper property      cost therefore reducing the property     might not be big enough therefore can’t store
                      cost will have a big impact on costs     enough products therefore customers can’t
                                                               buy what they want and wont come back= no
Spending less on      Could easily do it yourself and          If you do it yourself might look tacky therefore
decorations           easily find cheaper suppliers of         customers might not come = no money. If you
                      paint etc                                use poor quality materials they might not last
                                                               as long therefore you have to redo it costing
                                                               you more money
Spending less on      Could easily find a cheaper supplier     Might look tacky therefore your business
equipment             or buy second hand                       might get a bad reputation and people won’t
                                                               come = no money

Spend less on         Could use cheaper methods that           The method might not be as effective = fewer
advertising           could be just as effective e.g. having   customers = less income
                      black and white leaflets rather than
             Pass / Merit
Write up your report under your start-up and
  running cost tables.
• What can go wrong with your budget?
• Are you over or under budget? How can you
  save money?
• How does doing a start up budget help you with
  your business planning?
• What will you do if you have a high unexpected
  – Loan or Overdraft?

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