Your business plan needs to have solid numbers. Forecasting your numbers is the only way you’re going to know what’s going on in your business. New business or not, you can work expense numbers from the bottom up, and then check them from the top down. Here’s how.
Start with a list of the personnel you need. Make sure you include yourself, and do this even if you’re the only person involved. Make a list with names or positions or groups on the left and what you will pay them across 12 columns for months, then 3 more columns for the years, the first to summarize the first 12 months and the other 2 for years 2 and 3. That’s your personnel plan, and it gets you on your way. If you’re the only person involved, then it’s a simple list, but you will still need it, because you need to include yourself in the list of expenses.
Next, make a list of operating expenses. Start with what you’re paying people from the first list (payroll), because that’s an important expense. Then make a row on the list for what I call payroll burden — payroll taxes, insurance, and benefits — and calculate that based on payroll. If you have no idea, multiply the payroll by 20 percent as an estimate.
Continue with other obvious expenses. It doesn’t take past history to calculate how much space you need and estimate your monthly rent. You can do that with a few phone calls. Make a few more calls about what you’ll end up paying for telephones, computers, Internet access, bookkeeping, legal services, insurance, and other expenses. You should know enough about the business to be able to make estimated guesses for what you will have to spend on advertising, travel, sales and marketing materials, and other key expenses.
Make a third list for sales and cost of sales. You can’t make or sell a product or offer a service without having a pretty good idea what it costs to deliver. Break things down into component parts. Even services have cost components that you can estimate if you break them down: a taxi service has gasoline and maintenance; a publication has printing and paper; a store has inventory costs; a restaurant has food and drinks. Make a list and estimate how much you can reasonably expect to sell and what that will cost you. When those basic lists are done, check them against available industry information. You can find standard financial results for just about any type of business from database vendors such as Risk Management Associates (RMA) and Integra Information. You may also be able to find this information on the Web or even in your business plan software.
This will give you average gross margins and profitability for businesses like yours. What you will get will be a standard for comparison: if your gross margin (that’s sales less cost of sales) is double the average, then you probably haven’t included all your costs. If your profitability is way more than average, then you probably haven’t listed all your expenses.
Most of the time you can get another check on your numbers by looking at published financials of publicly traded companies. Find a few whose business matches yours in some way, and see what they report for percentage gross margins and profitability. Obviously these are all relatively big companies and their cost structure will be different from your startup, but you should know what they spend and why.
By the time you are done, you should have a solid estimate of costs and expenses. As the business starts, track that estimate against reality, compare back, and revise future budgets as often as you need to stay in control of cash flow and profits.