Pass 4 – Financial Aspects

•Produce a list of your start-up and running costs

•Produce and explain the start-up budget which includes details of the predicted costs

and revenues

Start-Up Costs

When a business launches a new product or service, they need to budget for start-up and running costs. They will need to estimate these costs in advance, to decide whether or not the product or service will be profitable.

Start-up costs are one-off costs paid before a new business is set up.

Running costs are the costs involved once the service has been launched, in order for it to continue. These are payable for as long as the service is available.

Examples of start-up costs

new buildings for businesses, or extensions to accommodate expanding ones

new machinery, vehicles or equipment (including installation and delivery costs)

researching the target market for the new business

initial advertising for the new business

initial stock for the new business

initial (first premium) payment towards insurance

costs incurred through staff recruitment and training.

Examples of start-up costs include:

Examples of running costs

Examples of running costs include:

rent

wages/salaries

maintenance

loan repayments

interest on loans

communications (telephone, Internet, etc)

mortgage repayments

advertising

stock

equipment

stationery

insurance payments

utilities(electricity, gas, water, etc)

travel expenses (petrol, MOT, insurance, etc).

Start-up or running costs?

Deep Fried Fred’s

Deep Fried Fred’s have set a maximum budget of £490,500 to cover start-up costs. The premises they originally had in mind for their new shop cost £410,000. The bigger premises are priced at £460,000.

£Premises 410,000Cash registers (x3) 600Brand new delivery vans (x3) 37,500Refurbishment of shop 9,500Initial stock 500Initial advertising 2,000Fryers for cooking (x3) 9,600

Total start-up costs 469,700

Budget 490,500

Spending = OK

Start-up costs

The spreadsheet they have set up allows Deep Fried Fred’s to see quickly and easily the effect on the total start-up costs of buying the larger premises. It also allows them to assess where they might cut costs in order to keep within budget.

How might Deep Fried Fred’s buy the larger premises whilst keeping within their budget?

My Start-Up Costs Start-up Stock I will have to buy … £1,000 -

£5,000

Property Rent I will be renting my property in … (name the street and town). I will have to make a “down payment”.

£1,000 –

£2,000

Equipment I will have to buy fixtures and fittings such as …

£4,000 –

£8,000

Advertising I will need to inform local people that my …… shop is opening

£500 –

£1,500

Decoration of new shop

I will need to decorate the interior £800 –

£2,000

Any other costs I need some spare money available for unforeseen payments

£500 –

£2,000

TOTAL START-UP COSTS

BUDGETED AMOUNT

Are you under or over your budget?

My Running Costs Stock I will have to top up my stock each

month depending on demand. I intend to spend £….. Each month

£100 - £750

Property Rent I will be renting my property in … (name the street and town). I will have to make monthly/weekly payments of £….

£500-1000

Utilities Each month I will need to pay for Gas, Electric and Water.

£50-150

Advertising Each month I will need to spend an amount on advertising to tell people about my products and services.

£50 –

£500

Communication I will have to pay for a phone line and an internet connection.

£20 –

£60

Insurance I need to pay a monthly amount to cover my insurance for my business.

£50 –

£150

TOTAL RUNNING COSTS

What can go wrong?Sometimes initial estimates can be inaccurate, which often results in the final costs for a project being much higher than originally predicted. There are a number of reasons for this:

the original estimates were incorrect

the decision-making process took a long time, and/or general delays in the process increased the overall cost

inflation increased the overall cost

the business did not properly monitor their costs.

Reducing my start up budget option

Benefits Drawbacks

Spend less on stock by finding a cheaper supplier

Can still buy stock but at a cheaper price

Cheap stock might be of a worse quality and therefore customers might not be happy with product and might not come back therefore lose customers and money

Spend less on rent by finding a cheaper property

This is a big expense as it is a running cost as well as a start up cost therefore reducing the property cost will have a big impact on costs

The property might not be in as good a location so people won’t come = no money, might not be big enough therefore can’t store enough products therefore customers can’t buy what they want and wont come back= no money

Spending less on decorations

Could easily do it yourself and easily find cheaper suppliers of paint etc

If you do it yourself might look tacky therefore customers might not come = no money. If you use poor quality materials they might not last as long therefore you have to redo it costing you more money

Spending less on equipment

Could easily find a cheaper supplier or buy second hand

Might look tacky therefore your business might get a bad reputation and people won’t come = no money

Spend less on advertising

Could use cheaper methods that could be just as effective e.g. having black and white leaflets rather than colour

The method might not be as effective = fewer customers = less income

Pass / Merit

Write up your report under your start-up and running cost tables.

• What can go wrong with your budget?• Are you over or under budget? How can you

save money?• How does doing a start up budget help you with

your business planning?• What will you do if you have a high unexpected

cost?– Loan or Overdraft?