Page 4: Costs - start-up and running
Starting a small business is not cheap. When a small business begins to operate it has many costs to pay. These can be split into start-up costs and running costs.
Start-up costs are one-off costs associated with setting up a business. For example, for a sandwich delivery service, these might include buying a van, getting uniforms for staff, bread baskets as well as cutlery and equipment. It may also include buying premises.
Running costs are the day-to-day costs associated with operating a business. For example, for the sandwich delivery business these might include the cost of petrol, payment for sandwiches or other raw materials, the payments to staff as well as overheads such as electricity and business rates. Running costs are usually divided into direct costs, which are specific to output or indirect costs, which are sometimes known as overheads. In our example, direct costs would include the sandwiches or other raw materials and the payments to staff. The indirect costs would include the electricity and the business rates.
Having identified these costs, it is important that cash within the business is managed properly. One way of doing this is through a cash flow forecast. This lists all of the likely receipts and payments of a business over a period and allows the entrepreneur to plan ahead.
Note that if payments are more than receipts then this is a negative cash flow and is shown in brackets. This business started up with £4,500 in the business bank account.
For students at Norbury Manor, nearly all of their indirect costs were paid for them. However, they did have to think about their start-up costs and their direct costs. For example, when they made badges or make-up, materials were their direct costs. They also paid 5% of their profits back to the school and 2 Â½% of profits had to be contributed to charities.
Sources of finance
Every modern organisation needs to draw on sources of finance. These provide it with the funds to carry out its activities. There are a range of sources of finance. Some of the more important ones include:
- the owner's capital as the business owners take the risk in setting up the business, it is only right that they provide some of the finance for the business
- banks banks will provide a range of facilities for small businesses. These include bank loans which are taken out for a fixed period. They might also include a bank overdraft. This is an arrangement between a bank and a customer to identify a limit on an account beyond which a customer will not be allowed to overspend
- venture capital venture capital companies provide finance for small businesses in return for holding shares in a small business
- trade credit providing goods for a period without having to pay for them immediately. This is an accepted practice in some industries. It provides a breathing space where small businesses can buy goods before they have to pay for them.
The students at Norbury Manor were supported initially with a £50 loan from their school for which there was a contract. In some instances students, acting as owners, contributed their own funds to support and develop their business ideas.