Information Booklet

Rs

Business
Startup

2
STARTUP
COSTING
OF BUSINESS
for SMEs
Rs.

Rs.
 Introduction

Small and Medium Enterprises Development Authority (SMEDA) works under the
Ministry of Industries and Production, Government of Pakistan and was established in
1998 with the objective to propel economic growth through development of SMEs.
SMEDA serves as an SME strategy-advisory body for the Government of Pakistan and
facilitates partners in meeting their SME development agendas.

SMEDA envisions growth of a globally competitive SME sector (in Pakistan), through
creating an enabling environment and support services for increase in the national
economy. SMEDA strives to achieve this vision by providing assistance in employment
generation and value addition to the national income, through development of the
SME Sector, by helping increase the number, scale and competitiveness of SMEs.

National Business Development Program for SMEs (NBDP) is a project of SMEDA

which intends to provide hands-on support services to SMEs. The aim of this business
development support provided by NBDP is to advance new businesses and improve
efficiencies in existing SME value chains to empower them to contend in global
market. NBDP expects to facilitate around 314,000 SME beneficiaries over the period
of five years.

Disclaimer

This information memorandum has been compiled to introduce the subject matter and
to provide a general idea and information on the said matter. The information has been
provided on as is where is basis without any warranties or assertions. Although, due
care and diligence has been taken to compile this document, the contained
information may vary due to any change in any of the concerned factors.
NBDP/SMEDA, its employees or agents do not assume any liability for any financial or
any other loss resulting from the information, as contained in this memorandum. The
contained information does not preclude any further professional advice. The
prospective user of this memorandum is encouraged to carry out additional diligence
and gather any information which is necessary for making an informed decision,
including taking professional advice from a qualified consultant/technical expert
before taking any decision to act upon the information. For more information on
services offered by NBDP/SMEDA, please visit http://www.nbdp.org.pk/ and
www.smeda.org.pk
 Objective

§ To elaborate the importance, advantages and techniques of estimating

and acquiring initial cost for starting a small business.

Table of Contents

a An Overview of Business Startup and Costing 1

b Categories of Startup Costs 1

c Calculation of the Cost Before Launching a Business 2

d Financial Plan for Your Business 4

e Templates and Tools for Startup Costing (Annex) 5

 a An Overview of Business Startup and Costing

There is more to a business than infrastructure and office space. Especially in the early stages, startup costs
require careful planning and management. Many new businesses neglect the important consideration as
well as making adequate funding arrangements for business startup process, relying instead on increasing
customers to keep the operation afloat, usually with poor results.
It is important to assess all the costs of a startup and make arrangements beforehand but as new
entrepreneurs and even some experienced business owners express, it is difficult to calculate their costs
accurately.
Startup costs are the expenses incurred during the process of creating a new business. All businesses are
different, so they require different types of startup costs. Online businesses have different needs than a
physical business e.g., coffee shops have different requirements than bookstores. However, a few
expenses are common to most business types, for instance research and business plan costs, office costs,
management costs, overhead costs and advertising and promotion costs, while some costs are not
common to all businesses but are still common to all manufacturing or trading business such as cost of
goods sold etc.

b Categories of Startup Costs

Startup costs are the expenses incurred before and during the process of
creating a new business.

Before setting up a startup business, costs include a business plan, research

expenses, borrowing costs, and expenses for provision of infrastructure, operations
and technology.

After setting up a startup business costs include merchandising/ work in process,

advertising, promotion, and employee expenses.

Different types of business structures-like sole proprietorships, partnerships, and

corporations-have different startup costs, so be aware of the different costs
associated with new business.

1
Here is the list of some of the costs that a startup business might incur.

Equipment
Office Space Communications Utilities
and Cupplies

Licenses Lawyer and Employee

Insurance Inventory
and Permits Accountant Salaries

Printed
Advertising Market Making a
Marketing
and Marketing Research Website
Materials

c Calculation of the Cost Before Launching a Business

Once the idea for startup is finalized, a business should start working on its details
including the kind of product or services to offer and how much will the
business be producing and selling to whom at what price. While the business
model is being shaped, one also needs to assess the costs involved in
setting up the new venture and managing it to the desired level of
operations.
Doing this exercise in detail helps to clarify number of ambiguities regarding
the business and prepares for managing the difficult task of establishing a
new business. Documenting this exercise is called developing a “Business
Plan”.
A business plan not only provides a business guideline to the entrepreneur, it also
helps in developing cost estimates, which helps in making adequate financial arrangements for the startup
and reducing the unwanted surprises in terms of financial shortfalls during the startup process.

Estimate How Much the Expenses will Cost

When starting a new business, one of the first steps is to estimate costs in establishing the startup. Once the
product or service outline is developed, including the type, size and quantities; estimate the costs involved
in developing these products or services.
Start with preparing lists of heads of the pre-opening expenses, post-opening and operating expenses and
legal and registration expenses.

2
Calculate an estimate of how much these expenses will actually cost. This process will be different for each
expense incurred.
A business needs to set up the chart of accounts. All small businesses do not all have the same chart of
accounts, but generally setting up the “Chart of Accounts” requires a business to identify costs in the
following heads;

Owner's
Assets Liabilities Revenue Expenses
Equity

For estimating the startup costs, the most important elements are estimating costs of assets and expenses.
While assets are straight forward costs, expenses are little difficult to assess. Particularly in terms of
differentiating between the one time and recurring ones.
Some expenses will have well-defined costs-permits and licenses tend to have clear, published costs. A
business might have to estimate other costs that are less certain, e.g., employee salaries. One can search
online and talk directly to mentors, vendors, and service providers to see what similar companies pay for
expenses. The employee salaries, utilities and rents etc. before commercial operations start are to be
amortized as a pre-operating cost.

Add up the Expenses for a Full Financial Picture

Once the business expenses and their costs are identified, organize the expenses
into one-time expenses and monthly expenses.
One-time expenses are some of the initial costs needed to start the business, in
addition to some portion of the monthly expenses. Buying major equipment,
hiring a logo designer, and paying for permits, licenses, and fees are generally Rs.
considered to be one-time expenses. A business can typically deduct one-
time expenses for tax purposes, which can save money on the amount of taxes
it will owe. It is important to keep track of the expenses and file the taxes in time.
Monthly expenses typically include salaries, rent, and utility bills. A business needs
to count at least one year of monthly expenses towards the startup cost, which is also
called sunk cost, but then treating them as regular expenses for next five years is ideal. Add up one-time and
monthly expenses to get a good picture of how much capital will be needed.

Use the Startup Cost Calculations to get Startup Funding

In addition to reflecting the startup costs in the business plan, it is a good idea to
create a formal request of the expected startup costs net of the personal
investment.
If a startup requires PKR 5 Million and the owner’s initial investment is upto
PKR 1 Million, then the business needs to have investment of PKR 1 Million to
make a formal financing/ request of PKR 3 Million.
It should be in a format that is clear and easy to understand. Investors and
lenders compare expected costs to projected revenue and determine the
potential for the business to profit.

3
 d Financial Plan for the Business

Knowing the estimated costs of starting a business is essential to plan a good startup. However, it is advised
to do more research and firm up the financial plan. Any business plan is usually complimented with
proforma income statement, balance sheet and cashflow statement. Adding these statements provide
confidence to the banker and investors. A business’s own requirement for the cash flow statement is also
highly desirable as it will indicate the cash requirements for future.
The first statement any banker and or investor wants to look at is the balance sheet. A balance sheet is a
business statement that shows what the business owns, what it owes, and the value of the owner's
investment in the business. The balance sheet is calculated at specific points in time, such as at business
startup, at the end of each month, quarter, or year, and at the end of the business.

Simple Startup Balance Sheet

In order to make these statements, it is better to engage a financial consultant or accountant. One can also
try it by themselves using accounting software e.g., Peachtree, Xero or QuickBooks, which are some of the
most popular small business accounting solutions on the market – and pick of the SMEs as the best overall
business accounting software programs. These are easy to use and loaded with features.

4
e Templates and Tools for Startup Costing ANNEXURE

(Business Name) Business Startup Costs

FUNDING ESTIMATED ACTUAL UNDER/(OVER)
Investor Funding
Owner 1 10,000 9,600 400
Owner 2 5,000 5,500 (500)
Owner 3
Total Investment 15,000 15,100 (100)
Loans
Bank Loan 1
Bank Loan 2
Non Bank Loan 3
Total Loans - - -
Other Funding
Grant 1
Other
Total Other Funding - - -

Total Funding 15,000 15,100 (100)

COSTS ESTIMATED ACTUAL UNDER/(OVER)

Fixed Costs
Advertising for Opening
Basic Website
Brand Development
Building Down Payment
Building Improvements/Remodeling
Business Cards/Stationery
Business Entity
Business Licenses/Permits
Computer Hardware/Software
Decorating
Franchise Start Up Fees
Internet Setup Deposit
Lease Security Deposit
Legal/Professional Fee
Machines & Equipment
office Furniture/Fixtures
Operating Cash (Working Capital)
Point of Sale Hardware/Software
Prepaid Insurance
Public Utilities Deposits
Reserve for Contingencies
Security System Installation
Setup, Installation and Consulting Fee
Signage
Starting Inventory
Telephone
Tools & Supplies
Travel
Truck & Vehicle

5
 Rs.
Conclusion

Developing a startup budget works as a road map

for establishing any type of business. Setting a
realistic budget is a game changer for any startup. It
helps entrepreneurs stay on track and keep their
eyes on the ultimate goal. Every startup should
adhere to the following key points:
1. The budget can be tweaked but following the
original plan is better.
2. Avoid a half-built business. Stay focused to
complete the tasks and achieve the goals.
3. Avoid getting into the debt by restricting
unnecessary borrowing of funds.