Costs Associated with Owning and Operating a Small Business.

Costs Associated with Owning and Operating

a Small Business.

Three Types of Costs Associated with Owning and Operating

a Small Business1. Start-up costs which are costs that are

required in order to open your business.

2. Continuing costs that are required in order to continue in business.

3. Expansion costs can be if a business owner wants to expand his/her inventory, number of employees, building and/or equipment.

Start-up Costs Associated with Opening a Small Business

Expenses that are initially paid to establish a business.

• Working capital – amount of cash needed to operating your daily operations to maintain a positive cash flow until you begin receiving money from customers.

• Rent or lease space

• Equipment, furniture, and fixtures

• Decorating and remodeling

• Beginning inventory

• Deposits for utilities

• Accountant and lawyer fees

• Licenses and permits

• Advertising and promotion for grand opening

• Contingency funds - Cash that is set aside for unexpected needs of the business.

1. Size of the business can affect start-up costs.Small businesses usually do not require as much money/capital to start as big businesses.

Nature of the business

Manufacturing may require a warehouse, machines to make goods.

Retail needs a place to sale their goods or services as well as cash registers, check readers, etc.

Wholesale may need storage space as well as trucks for delivery.

Service will need operating space.

2. Amount and kind of inventory requiredBusinesses such as a retail business would have to have products to sell. In order to open the small business entrepreneur would need money to purchase inventory.

3. Customer credit policiesIn order to accept credit card, you must establish an account with a credit card company and have a bank account. A new business owner would need capital to open the account in order to establish credit policies.

4. Other unique factorsThere may be cash requirements unique to your business. One example would be purchasing guard dogs if you have a security business.

5. The estimated time between starting the business and earning income from sales.

Establishing goals and target dates is beneficial in planning start-up costs. You must estimate how long before you will begin to make a profit and can meet your financial obligations. This provides the small business owner a timeline for establishing credit to obtain the start-up money needed and an expected timeline for paying back the money.

6. The operating expenses that must be paid before cash is received from sales.

You must plan how to cover expenses such as salaries, electric bill, phone service, etc. before you begin making a profit. Bills must be paid to maintain your credit rating. Good planning involves developing a plan to cover expenses and unexpected costs before you being to make money.

• Operation costs are the ongoing expenses resulting from the operation of the business.

• Operation costs include two types:

Fixed costs

Variable costs

•Expenses that remain the same for a period of time.

•Fixed costs include:Office salariesInsuranceRent or lease

Variable costs include:

1. Expenses that may change from month to month depending on the needs of the business

2. Costs that increase and decrease with the quantity of the good or service produced/sold.

Examples of variable costs include:

• Salaries and wages for employees

• Advertising and promotion

• Supplies and materials

• Utilities

Sample Start-up CostsOffice space rent………………………$500

Office furniture……..…………………$650

Computer/printer ..……………..……$2200

Advertising …………...………………$350

Office supplies………………………...$100

Phone and electrical service…………..$250

Fees and licenses………………………$ 75

Total……...$4125

If you determine that it will be 3 months before you make a profit, you will need to multiply the amount needed by 3 to determine the amount needed for start-up costs.

Ways to Control Costs

• Lease space instead of buying a building.• Lease equipment or purchase used

equipment.

• Monitor and control variable costs.

• Minimize waste.

• Assets – Liabilities = Owners Equity (or net worth)