Startup Expenses and Capitalization
You will have many
startup 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 c
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.