Startup Expenses and Capitalization

Starting a business always requires a variety of expenses to get the business of the ground. You
need to carefully estimate these expenses and then to indicate where you will get sufficient
capital to finance. This is part of the research phase and your research efforts must be thorough.
If your research is complete, there is less chance that you may inadvertently leave out important
expenses or underestimate them.

Careful planning and research can’t always anticipate the costs of starting a business. However,
you can make allowances for unexpected expenses. One approach is to “pad” each item in the
budget. If you use this approach, however, it destroys the accuracy of your plan. The other option
is to add a separate line item, called contingencies. This line accounts for the unforeseeable. The
second option is a better approach.

Talk to others business owners with similar businesses. You can ask them what to expect in
terms of contingencies. If you cannot find a business owner that is willing to share information,
another recommendation is to add 20 percent of the total budget to account for any
contingencies.

Your business plan should include an explanation of your research and how you gathered your
forecasts of expenses. Give sources, amounts, and any terms of proposed loans. Include detailed
explanations of how much each investor will contribute what percentage of ownership each will
have.