Start-Up Costs For Your Business

Transcription

1 Start-Up Costs For Your Business The first step in recording the costs involved in setting up your business venture is to estimate the total cost to purchase necessary assets. Assets to be purchased are one-time expenditures that must be incurred before your business can open its doors. You may need to purchase assets for operation such as, inventory, land, buildings, equipment (or renovations to leased premises), given your decisions made to location & facilities, and production methods & equipment required. Before choosing fixed assets, you should consider not only their cost but also the future expansion needs of your business. Alternatives, such as leasing certain fixed assets, or purchasing used items should also be considered. Whether leased or purchased, your fixed assets should contribute to your business's profits. Indicate the type of assets to be purchased and the estimated cost of purchase. When researching cost quotes, contact suppliers, wholesales, dealers, industry associations, and other similar businesses to ensure accuracy and sufficient total dollar amounts. Although many of these costs may be only estimates at this point, always be generous with the amounts. If you think something will cost you $1,000, allow $1,100. By the time you have completed all the work you have to do, prices may well have gone up. Land Land cost includes all earthwork, tree planting, roads and parking development. The initial price of land is only one aspect of the total potential cost. Ensure you are located close to your market; and you are close to raw materials and labor. Ensure the shape of the site is suitable for your building and operation. Also ensure the site has good access, is completely serviced, and parking space is adequate. No matter what site you select, do not forget about future expansion. Buildings Building cost includes all development, utility installation & hook up, engineers, consultants & contractors. The premises you occupy are an important part of your plan. Do you need a freestanding building, street frontage, small space, or what? Do you want to buy or rent? Are you prepared to undertake extensive renovations? Does your business require unusual building characteristics (high ceilings, reinforced floors, loading docks, etc.)? The decision to buy or rent may depend on the availability of your financial capacity. Before selecting a building for your business, you should give careful thought to the arrangement of machinery, equipment, work area, inventory & stock, and retail areas inside the building. Do not forget about future expansion, either horizontal, or vertical, or both. Common purpose buildings are the most readily sellable, so avoid if

2 possible any special features that would detract from the buildings attraction to other businesses. Heat, water, electric power and waste disposal are services your building will require. You will need to know what type and quantity of each of these services will be needed before deciding on the equipment and distribution for your building. You may have to install pollution controls for your type of business; and you may also need airconditioning, refrigeration, and special materials handling equipment such as power conveyors. Suppliers of this equipment can help you select the best size for your purpose. Choosing a suitable, fully serviced building is one of the most important business decisions you will have. When you have taken stock of all your requirements, get professional help for the final design. When determining your land and building costs, consider the following: Zoning- is the location zoned for your type of business activity and if it is to be rezoned what is the time span and the costs involved? Restrictive ordinances- may be encountered that make an otherwise ideal site less than ideal such as limitations on the hours of day when trucks can legally load or unload. Facilities- consider the outside and inside appearance, layout, lighting, heating floors, acoustics, comfort, waste disposal, parking, storage, leasehold improvements, equipment installation, landscape, snow removal, and future expansion. Government approvals- will government regulatory bodies approve your use of the building? This pertains to health, fire marshal, transportation, environment and labor. Transportation- consider shipping doors, truck access, truckload restrictions, proximity of truck terminals, rail and airport, bus route availability for employees, availability of courier and other specialized transportation services. Utilities- consider the adequacy of and/or cost to upgrade or completely install power, water, sewer, gas. Taxesconsider the present and future assessment for property and business taxes. Protection- consider the regularity of police patrols, availability and quality of fire protection, proximity to hydrants, sprinkler system, night watchman and history of vandalism. Neighborhood- consider the stability of area, compatibility of the neighbors; because their presence can either work for you or against you. Restrictions- consider protective covenants that may limit your sales, legal easements, potential for expansion. Insurance- consider insurance for fire, theft, liability, staff liability, business interruptions, and the insurance rating on the building. Renovations or leaseholds In you are renting/leasing facilities renovations or leasehold improvements will likely need to be incurred. Leaseholds are non-removable installations either original or the results of remodeling and can represent a substantial portion of your capital investment or they can amount to a few minor repairs. Leasehold improvements may include: carpeting and other flooring, insulation, utility installation and hook up involving electrical wiring and plumbing, bathroom installations, lighting, wall partitions, windows, ceiling tiles, painting, sprinkler system, security systems, some elements of interior design, altering or installing signage, sometimes heating and air conditioning, upgrading parking facilities, all engineering, consultants and contractor costs and other. You will need to

3 incorporate your business theme into the décor and your leasehold improvements must follow this. You may need comfortable, quiet offices where you and your employees will function effectively, and where you can conduct your business in an organized manner. In some businesses, it makes good sense to decorate your office or store layout interiors to create a fashionable image, and to display the goods, workmanship, and services of your business in an appealing way. In such case, some extra investment in renovations or leasehold improvements is warranted. However, do not overlook the fact that good products & services are usually a far more compelling force in attracting and keeping customers than a luxurious, expensive office or store appearance. Equipment & furniture No matter whether or not customers will come to your place of business, there will be certain equipment and furniture you will need in your place of business which will allow you to perform your services. When determining equipment requirements, consider the following: The feasibility of buying second hand or new equipment, installation costs, guarantees, duties or sales tax extras, maintenance costs, and plant layout. Equipment & furniture includes display shelves, workbenches, cash registers counters, display fixtures, desks, chairs, file cabinets, computers, seating, large pieces of equipment, and all installation. When selecting equipment & furniture you need to be specific about what it should do for you. How many units of your product should the machine handle in a given time to meet your sales requirements? How many operators can you afford to run the machinery? How much space is available for it? What quality must it be able to produce? There is probably the right machine, equipment and furniture available to meet your basic requirements. So make the equipment match your requirements. If you are manufacturing products, it is your machinery, equipment, and employees that make profits for your business, not land, buildings and furniture. Search for simple, good quality machinery and equipment at the lowest costs rather than top of the line terms at high cost. Equipment selection is a complex process; it may be beneficial to talk to a consultant. Different types of businesses will require different types of equipment. You don t want to rush into choosing your furniture, fixtures and equipment if you don t know exactly what you want or require. Furniture and equipment dealers are often good sources to tap to find out what you need. Their sales people will be more than willing to help you select your equipment. Exercise some caution before your buy. Get several opinions and several quotes before you select and equipment vendor. When buying equipment, price is not the only factor to consider. Be sure to install modern energy efficient equipment as much as possible. As gas an electricity costs rise, energy saving equipment becomes more and more valuable. Buying from a well know manufacturer that has reliable equipment and network of repair facilities is also important. Facility areas to consider purchasing equipment involve production, manufacturing, bathrooms, offices, retail, receiving & storage, customer reception, waiting room, display, etc.

4 Goodwill If you are purchasing an existing business you may be required to pay for goodwill. Goodwill may be thought of as the difference between an established successful business and one that has yet to establish itself and achieve success. The price the buyer should be willing to pay for goodwill depends on the earning power and potential of the business. Goodwill is defined as the value of intangibles, such as location, reputation, customer lists, franchises, supplier arrangements, quality of personnel, etc. Goodwill can be thought of as the difference between an established, successful business and one that has yet to establish itself and achieve success. Thus, a business that has run profitably for a number of years has a value over and above its asset value. Many sellers try to increase the value of goodwill by adding the potential they see for future business. However, that is not something you should pay for, but really only a factor you can use to decide whether or not to buy the business. Goodwill must result in profits. Profit in this context is a residue after operating costs, salaries, and return on the investment. Goodwill is an intangible because it is an opinion of the person evaluating it. It is not concrete like tangible assets such as building, equipment and other items that can be more readily evaluated. Banks may be more receptive to financing a business that has a past track record of profitability as opposed to a new business start. However, if goodwill is part of the purchase, the bank usually will not be interested in financing this portion of the purchase. Many businesses change hands with the seller providing some of the financing for goodwill in the form of an agreement for sale. This is especially true if the seller is retiring and does not need all the cash up front. Franchise fees If you are purchasing a franchise, there may be a franchise fee in addition to the fixed asset costs to startup and begin business operations. The franchise fee is payment for a well established and successful formula and strategy and support system for business success and profitability. Franchising has become a major force in today's business environment. Franchising allows a small entrepreneur to tap the highly developed management, marketing and purchasing skills of a large company with proven experience. The arrangement is covered by a contract. Franchising is a system of distribution used by companies to sell products or perform services. The company (franchisor) offers supply of product and equipment, the use of the name, technical expertise, personal training, lease financing, use of established marketing system, symbols and trademarks, and ongoing operational support for a franchise fee and in exchange for a continuing right to receive royalties from the operator (franchisee) and an entitlement to limit the amount of business control. The franchisee has some degree of autonomy, but must conform to the contract terms spelled out by the franchisor. These restrictions vary greatly, depending on the product or service being franchised. The aim of the franchisor/franchisee partnership is to be mutually beneficial to both parties, by combining the marketing and technical strengths of the franchisor with the local

5 market familiarity, energy and capital of the franchisee. Consult your lawyer to be sure you understand the contract terms. Patents / copyrights / trademarks Many small business owners are unsure of the meaning or significance of the area of law known as intellectual property. Intellectual property is referred to as intangible assets that do not have physical properties such as patents, trademarks, copyrights, and industrial designs, etc. The value of such assets is in the rights that their possession gives to your business. These terms and concepts are frequently confused with each other by the public. Whereas all of them are rights granted for intellectual creativity, they take different forms. Patents are for structure and function; whereas copyright is for literary, dramatic, artistic and musical works or computer software; industrial designs are for the shape, pattern or ornamentation applied to an industrially produced object; a trademark is a word, picture, or symbol, or package design, or combination of these used to distinguish goods or services by one person or organization for the goods or services of others on the market place. Patents A patent is a document that grants an inventor the exclusive right to manufacture, use, and sell an invention in Canada and the USA. Patents are granted for inventions, which are defined as any new and useful product, composition, apparatus, process, or any new and useful improvement thereof, that are not obvious to someone skilled in the particular field. Although a patent protects the exploitation of an invention's structure and function, it is occasionally confused with copyright, which protects literary and artistic works, or industrial design registration, which protects the design of industrially produced objects. Once a patent is granted, however, the patent holder may choose to sell it or license it. To obtain a patent, the inventor must provide a complete and detailed description of the invention to the Canadian and or American Patent Office. Patents protect inventions until 20 years after filing in Canada and the USA. After a patent has expired, anyone may use, manufacture, or sell the invention. Although a patent gives the inventor the right to prevent others from exploiting his/her invention in Canada and/or USA, the patent holder is responsible for protecting himself/herself through legal channels. Copyright A copyright in Canada and the USA is automatically acquired upon creation of an original literary, dramatic, musical or artistic work. These original works include books, writings, musical works, sculptures, paintings, photographs, motion picture films, dictionaries, encyclopaedias, and

6 computer software. They also include mechanical contrivances such as records, cassettes and tapes. Titles, names, and short word combinations are usually not protected by copyright. Generally, the item of a copyright in Canada and the USA exists for the life of the author and 50 years following his or her death; for records, tapes, other sound recordings and photographs, it exists for 50 years from the date of making the original plate or negative. Although basic copyright protection exists for those who do not register a copyright, it is advisable to do so. Those who do register are issued a certificate that can be used in court to establish ownership. Trademark A trademark is a word, phrase, symbol, design, drawing, picture, shape or combination of these used to distinguish the goods or services of a person or organization from those of others in the marketplace. It is not mandatory to register a trademark, but ownership is more easily protected if it is registered. The main advantage is the national scope of a registration. Trademarks are extremely valuable marketing devices and are generally defended to the full extent of the law. For the consumer, trademarks eliminate confusion and establish the origin and consistency of quality of a product or service. A trademark is registered for a period of 15 years from the date of registration and can be renewed for further periods of 15 years provided it continues to be used. Trademarks are valid only in the country in which they are issued. Therefore it is necessary to register in each country to which exports are planned if the trademark is to be protected internationally. Information can be obtained from a registered trademark agent. Industrial design While patent law is concerned with the functional or utilitarian qualities of an article, the Industrial Design Act covers the appearance of a useful article or aspects of the design intended to make it more appealing to the eye. An industrial design is any original shape, pattern, or ornamentation applied to the manufacturing of useful articles (e.g. the shape of a table or the decoration on the handle of a spoon). The article must be mass produced or intended for mass production. An industrial design may be registered in Canada and/or the USA if it is not identical or similar to others already registered. If a design has been published in Canada and/or the USA before being registered, it must be registered within 12 months of the publication date. The registered owner of an industrial design has the sole right to use the design in Canada for a period of five years, renewable for a further period of up to five years. Industrial designs may be sold outright or may be licensed for a period of time providing a legal form of transfer is employed. Integrated circuit topographies

7 Integrated circuit topographies are now considered a form of intellectual property. Recognizing the growing impact of integrated circuit technology in virtually all fields of industry, and the need to protect Canadian and American innovations in this technology both nationally and internationally, Canada and the USA has introduced protection for integrated circuit topographies. Topographies are innovative, three-dimensional circuit designs used in many different products. Examples of such products are automobiles, industrial robots, cameras, spacecraft, and computers. Vehicles Does your business need to own vehicles at all? If the answer is yes consider leasing vehicles, particularly if you require one or two new ones all the time for sales purposes. On the other hand, if you need a light delivery truck, you would probably use it for several years and then sell it for scrap or trade it in. Purchasing, rather than leasing, such a vehicle would probably be wise because the average annual cost over its life-time would be quite low. Inventory Most businesses will probably need some kind of inventory, parts or materials to operate. To control your investment in inventories you need to know regularly what quantities of materials, supplies, and finished goods your business requires in stock and what value to give them. If excess inventory sits idle, it is like having excess cash at the bank in a non-interest paying account. You cannot sell from an empty wagon, however this should not preclude you from paring down excess inventory to the minimum level necessary to support your customers. You must know the minimum amount of inventory you require to support your day-to-day operations while at the same time maintaining a small buffer for unexpected requirements. Ensure that purchases are made in economical quantities. Quantity discounts and declining unit freight costs are two critical determinants in the purchasing decision. Such savings have to be weighed against the cost of carrying the extra inventory and the amount of money that will be tied up in the process. The inventory of a manufacturing business will normally include raw materials, goods in process, finished goods, parts, and supplies, such as the packaging materials for finished goods. In nonmanufacturing businesses the inventory may consist of supplies or finished goods or both. Before

8 you make any supply arrangements examine the supplier's obsolescence policy. This can be a vital factor in service parts purchasing. You should also look at the supplier's warranty policy. You should also think about the type of stock control system you will need. A stock control system should enable you to determine what needs to be ordered on the basis of what is on hand, what's on order and what is being used. Some trade associations and suppliers provide systems to members and customers. Ensure you know how long it takes your supplier to deliver and whether the supplier maintains sufficient inventory for you to draw on. Signage Signs are one of the most efficient and effective means of communication. Signs help people find you; they reach people who are passing by your establishment; they present an image of your business. In short, signs tell people who you are and what you are selling. A sign must be noticeable. After a while a sign becomes part of the landscape. It loses some of its ability to attract attention. By periodically changing some small design element or by using changeable copy, a sign can continue to attract interest. Time and temperature devices or rotating and moving parts can be used to maintain interest in a commercial message. Your sign is the first thing a potential customer sees. Your sign should be sufficiently bright and conspicuous to attract attention without being garish, and sufficiently informative to let prospective customers know what you sell. Install a large professional looking sign that can be seen easily from all directions. Don t cut corners on this important advertising device. If your sign looks professional, potential customers are likely to conclude that your business is a professional operation. Design of your sign is very important. Your sign tells people a lot about your business. Stark simple design and materials may suggest discount prices and no frills. Elegant and expensive sign materials may suggest luxury goods and services. The size of the sign is an important consideration for your business. The biggest sign that you can afford may not necessarily be the best one for your needs. A sign should go with its surroundings. A sign that is either too big or too small will not communicate your message effectively. The number of signs is also important. Too many signs compete with one another and reduce the effectiveness of your message by presenting an image of confusion to potential customers. The materials used for your sign determine its appearance and performance. For example, differences in cost, appearance, colour, durability, flexibility and reaction to extreme weather conditions can be found in the many types of plastics available. The structure of a sign also contributes to its effectiveness. Pole covers and cantilevered construction help portray an attractive message. Determine what the regulations are in your community before you discuss design with a sign designer. Most sign companies are well aware of the regulations in any given community and can guide you in selecting a sign that is not in violation of the law.

9 Other start-up costs If you are starting a new business you will incur start up costs other than through purchasing assets. There are many other costs in the pre opening and opening phase of your business including legal and accounting fees, insurance premiums, deposits for the landlord, deposits for utilities, business licenses & permits, office supplies & stationary, operating cash, advertising for the opening, and opening day special expenses (food, advertising, etc). Whether you have the funds (savings) or borrow them, your new business will have to pay back these start-up costs. Keep this fact in mind as you work on the "Expenses" section, and on other financial aspects of your plan. When determining your total start up cost you must also provide for contingency and reserve funds. The contingency fund is set up to cover unexpected expenses. This may represent 10% to 25% of total planned expenses. A reserve fund is established to carry the new business through the initial period of operation when there may be reduced revenue. You may be fortunate to have an immediate customer base and therefore will only require a modest reserve fund. Since this is a rare situation, you should set aside money and prepare for costs to cover a minimum of three months for overhead costs and salaries. In many cases, sufficient funds for a period of six months or possibly up to a year should be set aside to carry the business until it can sustain itself.