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How to Project Expenses for a New Business
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How to Project Expenses for a New Business
People often ask me how they can project basic numbers for a new business that hasn’t started yet. I’ve done some things already, in this space, on how to do that for a new product and a sales forecast (links in the last paragraph). In this post I’m offering the same kind of advice for projecting expenses.
Why expenses? Because if you estimate sales and cost of sales (also called direct costs or cost of goods sold, alias COGS) and can also estimate expenses, then you have everything you need for projected (also called pro-forma) profit or loss. And that gets you well on your way to the basic business numbers you need.
Here’s what I recommend for estimating expenses of a new business:
- Set up an empty spreadsheet with room for row labels in the leftmost column, then 12 columns for months to the right of that, and a column for the first year on the far left. Make that rightmost column add up the numbers in the 12 monthly columns to its left.
- Set up a section in it named “People” or something like that. For me, that’s just an empty row with a title in the leftmost column. In the rows below that, you’re going to list the people the business needs. Think of that as one person per row (such as Leslie the chef and Terry who waits on tables) or, in a more ambitious plan, groups of people, like chefs, people to bus tables, people to wait on tables, etc.
- Start the list with the people the business needs to launch. Identify them in the leftmost row and put their monthly gross salary across the row in the months.
- Add to the list the people you think -- you guess, you imagine -- the business will need to add as it gets through those first 12 months. Show which month you guess you’ll need them by typing their estimated gross earnings beginning in the column for that month, and continuing to the end of the year.
- Set up a row called “Subtotal” that ends the section by adding up all the numbers in the rows above it. Use your spreadsheet to do that simple math.
- Set up a section named for overhead or fixed expenses or whatever you want to call rent, utilities, Internet access, and other expenses you’ll pay to be in business. Label each of them accordingly, and estimate what each will cost, month-by-month, for the year. Not all expenses will apply from month one. Some will start later. And some will increase as the people increase. And among these rows make sure you have one that estimates employer taxes and health insurance and benefits. Use your spreadsheet to make that estimate depend on the subtotal for people costs in the section above it. If you have no idea, take your total gross compensation and estimate 25% of that, in this row, for these additional expenses. The rest of this is educated guessing, and you should educate your guess. Take office rent as an example: call some real estate people who rent offices, so you have an educated guess. The same for insurance (call brokers), utilities and so forth. Finish this section with a subtotal row that adds these expenses up to a subtotal.
- Set up another section for other expenses or discretionary expenses or something like that use it to list your educated guesses for expenses such as marketing, advertising, research, consulting, commissions and so forth. Make your educated guesses, calling on people you know, people you might use as vendors and your industry experience. Make a subtotal row for this section too.
When you’re done, you have projected expenses.
I’ve posted before on how to do sales and costs of sales, on this blog, specifically 5 tips to help you forecast sales and 4 Practical Ways to Forecast a New Product, and especially this video on how to do a sales forecast.
When you’ve finished the expense projection I’ve described here, plus the sales and costs of sales projections I’ve explained in those other posts, you can combine them to project profits. Well, technically you have what you need for EBITDA, which stands for “earnings before interest, taxes, depreciation and amortization,” and is a good stand-in for profits.
These are really useful estimates for planning and budgeting. And they are relatively easy to do from the standpoint of the math and finance. The hard part is getting the assumptions right. But that’s why we do plan vs. actual analysis, and management; and you can’t analyze plan vs. actual unless you have plan.
About the Author:
Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 44 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including The Plan As You Go Business Plan, published by Entrepreneur Press, 2008.