Startup Expenses and Capitalization
Located after the Personal Financial Statement in a Business plan, this section helps you to financially plan for the startup costs. Be aware that there will be plenty of expenses before your business really starts operating, so estimate those expenses carefully and plan where you will be getting the necessary money to fund it. Remember, the more research you do will lessen the chance of leaving out important expenses or underestimating them.
But even the best research comes with a few bumps, or “surprise expenses.” Luckily, there are two ways to prepare to meet the unexpected. The first way is to add a little “padding” to each item in the budget. The only downside is that it ruins the accuracy of your planned budget. The second way is to simply add a new line, called contingencies, used purely for smoothing out any bumps. This approach won’t interfere with your estimated budget and is highly recommended.
Talk to similar business owners to get an idea of what you should allow for contingencies. If you are unable to gather sufficient information from them, simply use the Contingency Rule of Thumb: Contingencies = 20% of the total of all other startup expenses.
And of course, explain your research and justify your estimated budget. Make sure to include sources, amounts, and terms of proposed loans. Include how much will be donated by each investor and what percent of ownership each investor will hold.
Next section in the business plan: Financial Plan
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