Expenses

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I am writing a daily blog series on how to start a business.  If you’d like to review previous posts on this series, you can find them here:

So You Want to Start a Business
Revenues, Direct Costs and Expenses… Oh My!
Hourly Rates
How Can You Earn More Revenue without Spending More Time
Direct Costs and Gross Margin

The next category that should be calculated for your financial forecast is Expenses.  Expenses are all costs that cannot be directly associated with items your customer purchases.  Expenses are sometimes called Fixed-Costs because they will not vary much regardless of how much your customers purchase.  Expenses can also be referred to as Overhead.

The types of costs that will typically be estimated in the Expense category include: Advertising, Facility Rent, Phone, Internet, Insurance, Office Supplies, Web Hosting & Email, Utilities, Accounting, Legal Fees, Sales Labor, Marketing Labor and Management Labor.   Although these costs are necessary to run a business, they are often not directly related to the products and services being sold to customers.

It is not uncommon for a first-time small business owner to miss critical expense costs in their initial financial forecast.  Business consultants can help new business owners capture all expenses required to start and operate a business.   It is also not uncommon for new business owners to go overboard on expenses.  It is important to understand that expenses are not directly related to value a customer is gaining by purchasing a product or service.  Therefore, expenses should be kept as low as possible.  Especially, when you are starting out.

In all cases, a business owner needs to keep expenses lower than their anticipated gross margin amount.  Otherwise, you will be losing money.  If you have gross margin of $40,000 and expenses of $50,000, you will be losing $10,000.  I will talk more about profit in my next blog post.