How much does it really cost to open a business? The expenses forgotten in the business plan

The real cost of a new business is not the same as the sum needed to open it.

Works, furnishings, equipment and the security deposit are only part of the investment. To know how much capital you really need, you have to add the costs incurred before opening, contingencies and, above all, the cash needed to keep the business going during the first months.

Many projects run into difficulty not because they lack customers, but because they run out of cash before reaching a sufficient volume of sales.

To avoid this mistake, the budget should be divided into four areas:

• initial investment;
• pre-opening costs;
• contingency fund;
• cash to run the business in the first months.

1. The initial investment is not the only cost to calculate

The first part of the budget covers what is needed to make the business operational:

• works and alterations to the premises;
• systems and installations;
• furnishings;
• equipment;
• hardware and software;
• signage;
• security deposit;
• first supplies;
• opening stock.

These expenses are fairly visible and, precisely for that reason, are generally included in the business plan. The problem is that they are often estimated without a sufficiently precise project.

With furnishings, for example, the difference is considerable. If there is a design, a list of the items needed and a budget assigned to each item, the scope for control is high. If, instead, you proceed by choosing whatever you like as you go, without a set limit, the overall cost can rise quickly.

Opening stock is also often underestimated. Buying a minimum quantity of product is not enough: you need to ensure variety, availability and continuity of stock. At the same time, buying too much means tying up cash in goods that might sell slowly.

The right quantity depends on the expected stock turnover, reorder times and the shelf life of the products. It should not be determined only by the space available or by the discounts the supplier offers.

2. The costs incurred before opening

A significant part of the investment is absorbed when the business has not yet started generating revenue.

The main pre-opening costs can include:

• design and technical consultancy;
• administrative procedures and permits;
• tax, legal and employment advice;
• deposits and contractual advance payments;
• rent during the works;
• utilities and connections;
• staff recruitment and training;
• obtaining certifications and qualifications;
• creation of the website and marketing materials;
• launch campaign.

These sums come from the entrepreneur’s personal cash or from the financing obtained, but they cannot be recovered immediately. They are also part of the business risk: if the project did not get off the ground or did not achieve the expected results, they could be lost entirely.

Before investing, therefore, you need to assess not only how much money you have, but also what consequences losing it would have on your personal and family life.

The capital set aside for the business should not leave the entrepreneur without a reserve for their own private needs.

3. Building works, deliveries and permits can delay the opening

A planned opening date is not a guaranteed opening date.

When alteration works are needed, technical problems, changes to the project and delays can arise that increase costs and postpone the start of the business. Even a delay in the delivery of furnishings or equipment can prevent you from opening on schedule.

Another variable is permits. The paperwork must be planned carefully, but the timescales of public offices cannot always be defined with certainty.

During the delay, however, some expenses are already running:

• rent;
• utilities;
• loan repayments;
• insurance;
• professional fees;
• any staff already hired;
• the entrepreneur’s personal costs.

The business is therefore consuming cash without yet being able to take any in.

For this reason I would add to the budget a safety fund of at least 10% of the planned investment, when there is a precise project backed by reliable quotes.

If, instead, you proceed without detailed planning, taking decisions day by day, the reserve should increase and can reach 25%. In this second case, however, it is not only the financial risk that grows: the very possibility of controlling the investment is lost.

4. Staff cost more than their net salary

Two recurring mistakes are made when calculating staff costs.

The first is underestimating the number of people needed to guarantee good service. Organising the business around the theoretical minimum headcount does not take into account peaks in workload, rest days, holidays, sick leave and cover.

The second mistake is considering only the net salary the employee receives.

Before hiring, an employment consultant can calculate the exact gross cost of each position. The forecast must also include:

• social security contributions and charges;
• additional monthly salaries;
• holidays and leave;
• overtime;
• cover;
• sick leave;
• mandatory training;
• medical examinations;
• certifications and qualifications;
• workwear or work equipment.

Staff hired before opening are also a pre-operating cost. In many businesses you need to train the team, test procedures and prepare the service before the first customers arrive.

Cutting this phase short to save money can result in disorganisation, mistakes and a poor experience precisely during the first weeks, when the business has to build its reputation.

5. Rent and bills must be estimated realistically

Rent, staff and utilities are among the items with the greatest impact on a business’s sustainability.

Bills are often entered in the business plan as generic estimates, without properly considering:

• size and characteristics of the premises;
• opening hours;
• lighting;
• heating and air conditioning;
• machinery used;
• refrigeration;
• consumption needed even when the premises are closed;
• seasonality of energy costs.

An estimate that is too low can distort both the monthly requirement and the break-even point.

It is better to look for data on similar businesses, analyse the consumption of the equipment and build at least one prudent scenario. The same attention should be paid to service charges, maintenance and any shared costs not included in the rent.

6. Marketing is not an optional expense

Today much of the information and many purchasing decisions go through the internet. Except in particular cases, for example a business located on a street with very heavy tourist footfall and with an already well-known product, opening without a communication plan means leaving things to chance.

The budget can vary greatly depending on the product, the area and the target, but it must be planned from the start.

It can include:

• visual identity;
• website or presentation page;
• photographs and content;
• social media management;
• online advertising;
• promotional materials;
• launch activities;
• initiatives to win and retain the first customers.

Marketing should not be limited to the opening. The business will need to keep communicating and acquiring customers in the months that follow too. It is therefore necessary to distinguish the cost of the launch from the ordinary monthly budget.

7. The cash needed after opening

The most important item, and often the most neglected, is the capital needed to sustain the business until it reaches break-even.

You cannot build the budget assuming that sales will immediately cover all expenses. Revenue might grow more slowly than expected, while rent, staff, utilities and suppliers will have to be paid regardless.

I recommend planning cover of between three and six months. The higher the overall costs, the longer the reserve should last.

The basic calculation can be set out like this:

Operating cash = expected monthly costs × months of cover

The monthly costs must include:

• rent and premises expenses;
• staff;
• utilities;
• raw materials and restocking;
• professional fees;
• software and services;
• ongoing marketing;
• loan repayments and insurance;
• an allowance for variable and unexpected expenses.

For example, if the business needs €15,000 a month and you decide to guarantee four months of cover, the operating reserve should be at least €60,000. This sum is separate from the money needed to carry out the works, buy the furnishings and prepare the opening.

8. The real cost of the project

The overall requirement can be summed up with this formula:

Real cost of opening = initial investment + pre-opening costs + contingency fund + operating cash

To these items you should add a personal reserve for the entrepreneur, especially if they will not receive a salary or other income during the start-up phase.

Before going ahead, the project should therefore answer five questions:

• How much does it cost to get the business ready to open?
• How much will I spend before I can take any money in?
• What delays and unforeseen events can I reasonably expect?
• How much does it cost to keep the business running each month?
• For how many months can I sustain it without depending on expected sales?

If any one of these answers is missing, the budget is not yet complete.

9. The financing must also cover the start-up phase

Financing can make a good project possible, but spending all of it on works, furnishings and equipment is a serious mistake.

Opening with finished premises but no cash to run them means being under strain from day one. The entrepreneur will start delaying payments, cutting staff, limiting stock or dropping necessary activities.

Even if they do not want it to, the customer experience will pay the price.

The result can be paradoxical: a potentially sound project is compromised because it lacks the resources needed to work well in the most delicate period.

Before accepting a high investment, choosing an expensive location or deciding on the fit-out, you therefore need to establish which part of the resources must remain available for running the business.

Opening does not mean the risk phase is over

Opening is not the finishing line of the financial plan. It is the moment when forecasts begin to be measured against the real market.

A prudent budget does not serve to eliminate risk, which is impossible in any business venture. It serves to prevent a forgotten expense, a delayed permit or slower-than-expected sales growth from immediately turning a manageable difficulty into a crisis.

Calculate the real cost of your project before you invest.