Preliminary expenses are costs people incur in the process of opening a new business. Also known as pre-opening expenses, they can vary, depending on the nature of the business. People developing a business plan for a new business must consider preliminary expenses and sources for funding, as they need enough money to open the business and keep it open while a client base begins to be established. Failure to anticipate these costs can result in a business failure shortly after opening.
Things that must be considered when creating a preliminary expenses estimate include facilities, equipment, early payroll needs, attorney fees, registration fees, and investments in initial inventory. These costs can rack up quickly and unexpected expenses may surface while opening a business, requiring people to create a cushion in an estimate so these costs can be absorbed without completely derailing a business plan. A business might, for example, need to make extensive repairs to the electrical system in a facility before opening.
In the process of estimating preliminary expenses, people can consult other businesses, accountants, and references designed for business owners. Many municipalities offer basic budgeting guidelines for businesses to give them an idea of startup costs for similar businesses in the area, on the basis of reporting provided by existing businesses. Books with information to help people get a new business off the ground can also cover common expenses and provide information about adjusting them by region to get the best possible estimate.
People usually need to seek funding from outside sources for preliminary expenses, unless they are independently wealthy. This can include approaches to investors, asking for capital in exchange for a share in the business, along with applications for loans from banks and other financial institutions. The cost of servicing loans and investors is also an important factor in operating costs that cannot be left out when determining how much money a business needs to get started and stay open while it starts turning over a profit.
Depending on the industry, businesses may be able to recoup their preliminary expenses very quickly, or it may take a longer period of time. Restaurants, for example, often remain indebted for the first year or more because the initial outlay of cash is very high. Once the business starts turning a profit, the owners can consider investing in new opportunities to expand and keep the business as up to date as possible.
