Startup costs: build an investment budget a lender can check

Ask a founder what the start will cost and you usually get a shopping list. A lender asks something else: how much money must be available before the business pays its own way, and how much of it will still be worth something in five years? Your startup costs, set out in an investment budget, answer both questions. They are the first table of your financial plan, and they feed the financing plan, the depreciation in your profit and loss forecast and the opening months of your cash flow forecast.

The example below is in euros. The method is the same in any currency.

Which question do startup costs answer?

The investment budget gives the total amount you need before revenue covers your running costs. That is more than the equipment: it includes stock, deposits, one-off costs and a cash buffer. Keep those groups apart, because each is financed, taxed and recovered differently.

What belongs in your startup costs

On top of these comes the cash buffer, also called working capital: the money that keeps you going while stock waits to be sold and invoices wait to be paid. It is not spent on anything specific, which is exactly why founders leave it out.

How depreciation works: straight-line and useful life

Most business plans use straight-line depreciation: the same amount each year over the asset's useful life. Useful life is your honest estimate of how long you will use the asset, not the longest it could possibly last. Residual value is what you expect to sell it for at the end.

Tax rules may let you write off assets faster than your plan does. Keep the two apart. In the profit and loss forecast, use a realistic economic life so that profit shows what the business earns. Faster tax write-offs lower the tax you pay in the early years, which is a cash effect your accountant can calculate.

Small assets and fast write-offs in several countries

Many tax systems let a business deduct small or qualifying purchases at once instead of depreciating them. The thresholds below are for tax purposes and differ widely.

• Threshold basis: does the limit apply per item, per invoice or per year, and including or excluding VAT?
• Exclusions: are cars, buildings or second-hand assets treated differently?
• Conditions: is there a turnover limit, an election to make, or a form to file?
• Timing: does the asset have to be in use before the end of the tax year?

From wish list to evidenced amounts

1. 01

   List everything for opening and the first three months

   Walk through a normal working day and note what you need for it.

2. 02

   Separate must-haves from later purchases

   What do you need on opening day, and what can wait until revenue pays for it? Second-hand or leased equipment often does the job at the start.

3. 03

   Replace estimates with quotes

   Get written quotes for the larger items and keep them for the appendix. A lender trusts a quote more than a round number.

4. 04

   Show VAT or sales tax separately

   Budget amounts excluding VAT, but add a line for the VAT you pay up front. You get it back later, but the bank account has to carry it first.

5. 05

   Add a contingency and a cash buffer

   Renovations overrun. Size the buffer from your cash flow forecast: it must cover the lowest point of the first year with room to spare.

Worked example: startup costs for Chainline Bike Workshop

Leo opens a bike repair workshop that also sells bikes. He rents a unit at €1,500 a month and needs a van for pick-ups and deliveries. His investment budget:

Fictitious Firmfocus example. Amounts exclude VAT. Van: (€15,000 - €3,000) / 5 = €2,400.

The fixed assets add up to €45,000 and cost €8,800 a year in depreciation, which appears in his profit and loss forecast. The stock of €20,000 is not a cost until the bikes and parts are sold. The deposit of €4,500 comes back when the lease ends. The €2,500 of start-up costs reduces profit in year one.

Then the VAT. Leo assumes a rate of 20% for the example. On €45,000 of assets, €20,000 of stock and €2,500 of start-up costs he pays €13,500 in VAT up front. That is more than his buffer of €8,000. He recovers it through his first quarterly VAT return, partly by offsetting it against the VAT on his sales and partly as a refund in June. Until then the bank account carries it, and his cash flow forecast shows that March, the opening month, ends with just €2,930 in the bank.

Small start or larger start

Pitfalls in startup cost budgets

• Forgetting working capital: the budget covers everything you buy and nothing to live on while customers find you.
• VAT not pre-financed: the amounts exclude VAT, but the bank has to pay the invoices including it.
• An optimistic fit-out: one quote, no contingency, and no allowance for what the builder finds behind the walls.
• Expenses treated as assets: putting the opening campaign under assets makes year-one profit look better than it is.
• The deposit as a cost: it is money you get back, so it belongs in the budget but not in the profit and loss forecast.

Once the total is clear, the next step is matching it to sources of money in the financing plan. For tax registration and bookkeeping see tax and bookkeeping; the overview of business plan financials and Start a business show where this fits in.