The following is a post to from Patrick Mackaronis. Patrick is the Director of Business Development for New York City-based social network Brabble. In this post, Patrick speaks about maintaining a business ad the costs involved. Patrick can be best reached on Twitter at @patty__mack.
Owning your own business can be exciting and satisfying. The cost of starting a new business, buying an existing business, taking out loans, and applying for licenses are among the start-up costs. But before you jump in, spend plenty of time projecting the cost of maintaining your business. How much income will you need to earn in order to meet your expenses and make a profit?
Expenses vary according to the type of business you want to develop. However, many of the categories of expense will be the same.
Types of Expenses
- Cost of Goods – Are you manufacturing, buying products to resell, or selling your service? Consider how many units of goods or service you can make, store, or provide and how often you will have to buy more inventory. In general, the cost of goods is one-half of the amount that you charge your customers. For example, if you pay $2 for an item, you charge your customers $4 for it. You may have to pay state, province, and local municipality sales tax to your sales. Check for local tax rates with your local government offices.
- Salaries – Will you have to hire others to work for you? If the business is in the United States, compute their salary as well as the cost of such things as Social Security, Medicare, Federal income tax withholding, and Federal unemployment taxes that you will have to pay as a percent of their earnings. In general, double the hourly wage to get an idea of the expense per employee in salary, tax, training, and incidentals. If you will be employing more than 10 people, consider the costs of adding health insurance as a benefit in order to attract and retain good employees. This is expensive, but may be worth it in the long run so that you will not have to spend time and money advertising for, interviewing, and training new employees. Remember that you will also have to pay taxes on your earnings, including self-employment taxes. In the United States, the IRS reviews business taxes on their website.
- Rent – Small business owners often lease space in a shopping area. The cost varies but generally runs between $10 and $20 per square foot. For example, a 1,000 square foot space might cost $12 per square foot or $12,000 per year. Rent is usually paid monthly, so would be $1,200 per month in this example. Utilities such as water and electricity may be separate. Read your lease agreement carefully for information about your responsibility for fees associated with the building exterior or parking lot maintenance.
- Loan – If you have to take out a loan to buy an existing business or franchise, add it to your monthly projection of expenses.
- Advertising – A rule of thumb is to set aside 1 to 2 percent of annual sales for advertising. To lower expenses, consider using as many different forms of marketing and public relations as possible, ask customers how they heard about you, and hone in on the marketing methods that attract the most customers.
- Office Expenses – You will need envelopes, stamps, cleaning supplies, seasonal decorations, cash register paper, business cards, pens, and more. While expenses can vary, don’t shortchange yourself here. It is important to project yourself confidently and look like you are in business for the long run.
- Telephone and Internet – A phone and Internet connect generally cost about $75 per month. The number of connections and add-on services can increase this.
- Bank Fees – The bank fee for a credit card machine is about 2 percent per transaction or less. Ask if there is a fee for leasing the machine. Also ask your bank for a schedule of other charges for business services.
- Professional Services – Will you be paying an accountant to complete your payroll and taxes? Will you need an attorney to review your lease? Consider including $100 to $200 per month for such services.
Ask friends who own businesses and consult neighboring business owners if they can think of any other expenses.
Project Expenses against Income
Once you are satisfied that you have a good idea of the expenses, you will know how much you must sell in order to break even. Project sales at different levels to see how much income you will need to make in order to cover expenses and sustain your lifestyle.