HOW TO FORECAST EXPENSES?

Forecasting expenses during the startup stage is really more art than science. Many entrepreneurs complain that building forecasts with any degree of accuracy takes a lot of time–time that could be spent selling rather than planning. But in order to run the business, and to present the business to any third party, you have to have a set of thoughtful forecasts. More important, proper financial forecasts will help you develop operational and staffing plans that will help make your business a success.

You must forecast every expense of the business including:

  • Startup Expenses. All the costs of getting your business up and running go into the start-up expenses category.
  • Fixed Costs. All the overhead costs of the business:
    • Rent
    • Utility bills
    • Phone bills/communication costs
    • Accounting/bookkeeping
    • Legal/insurance/licensing fees
    • Postage
    • Technology
    • Advertising & marketing
    • Salaries
  • Variable Costs. All of the costs that vary with the business.
    • Cost of goods sold
    • Materials and supplies
    • Packaging
    • Direct Labor Costs
    • Customer service
    • Direct sales
    • Direct marketing

“Forecasting makes you think long and hard about the decisions you make.” 

Here are some rules of thumb you should follow when forecasting expenses:

  • Marketing. Double your estimates for advertising and marketing costs since they always escalate beyond expectations.
  • Legal and Insurance. Triple your estimates for legal, insurance and licensing fees since they’re very hard to predict without experience and almost always exceed expectations.
  • Sales and Customer Service. Keep track of direct sales and customer service time as a direct labor expense even if you’re doing these activities yourself during the startup stage because you’ll want to forecast this expense when you have more clients.
  • Information about Other Businesses. If you have experience in the type of business you are starting—for example, you worked at a similar business before striking out on your own—you will probably have some idea of realistic financial projections, or may be able to talk to someone who can give you more information.
  • Accountants Can Help. Enlisting an accountant familiar with small businesses and startups in your industry will help. An accountant will know what type of expenses, sales and profits a well-run business in your industry can expect, and will be able to help you come up with realistic financial projections.
  • Industry Info. Industry associations and publications can help you compile accurate financial information.

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