New entrepreneurs frequently underestimate the real costs of operating their businesses. It’s understandable that if you haven’t run a business before, you’re likely to overlook something – whether it’s insurance, or advertising, or staff benefits. So where do you start?
Projecting expenses for a new business is somewhat of a guessing game. You have to estimate expenses when you don’t know the exact amounts, and then go back later to see if your actual spending was higher or lower than that.
Here are a few tips to improve the accuracy of your financial forecasts, where expenses are concerned.
Know Your Direct Costs
First things first: figure out the difference between a direct cost and an indirect cost. Your direct costs (also called COGS, or Costs of Goods Sold) are things you have to pay for only when you sell a product or a service. For example, a bakery’s direct costs are ingredients and packaging. A marketing company’s direct costs might include subcontractors like copywriters or designers.
Create Your Operating Budget
Indirect costs, also called operating expenses, are things you have to pay for even if you don’t sell a single thing. That’s your lease payments, your phones, you marketing, your staff, your insurance, and more.
Trying to list all of your expenses can be exhausting, so start by creating budget lines for all the expenses you know already: your lease payments, your phone and internet bills, your accounting system. These fixed expenses won’t change from month to month, so they’re easy to budget for.
Once you’ve done that, it’s time to move on your variable operating expenses, which might be tougher to forecast. How much you will spend on marketing is a huge unknown.
If you’re not sure what to enter here, try to find statistics for your industry on the Industry Canada benchmarking tool web site, to get a sense of the average for your size of company. You can also do this for other variable expenses like contract labour, repairs and maintenance, meals and entertainment, or office supplies.
Here’s a tip: build in a contingency budget to cover unexpected expenses. I recommend that you add 10% to whatever your projected operational costs are, and add that 10% as a separate line in your budget. If you don’t have to pull from that pool, great; but having it there helps you build a safety net that you might need during slower times, or you can save it up to help fund an expansion down the road.
Create a Tracking System
Even before you launch your business, you’ll want to create a simple system for tracking all of your expenses. You might try a cloud-based accounting system or choose to save receipts for a bookkeeper to deal with.
Whatever you choose, make sure you look back at the end of each month to see where you came in under budget, and where you went over. This practice means you’ll always know the financial health of your business, and you’ll be more empowered to project expenses accurately as your business grows.