Lesson 5: The costs of doing business
In today’s lesson, we’ll use a worksheet to take a look at the expenses you’ll need to start your business, and balance that out with the income you can generate.
Now is the time to take your ideas from just an abstract thought into a real, solid business. This lesson is mostly theoretical but will leave you with a good idea of your income and expenses when you’re ready to launch.
First things first: you need to consider how you want to structure your business. Despite what kind of business you are or how niche you think your services may be - there's a good chance it will fit within the categories of the most common business structures, which are detailed below.
|SOLE TRADER||gives you full control|
|COMPANY||limits your legal liability, a little more complex to set up|
|PARTNERSHIP||two or more people who distribute income and losses|
|TRUST||a trustee is responsible for business operations|
In New Zealand:
|LIMITED LIABILITY COMPANY||the most common type of company|
|CO-OPERATIVE COMPANY||sometimes known as co-ops, these are limited liability companies owned and controlled by members|
|UNLIMITED COMPANY||these are rare, they don't limit shareholder liability for company debts|
We suggest speaking to a lawyer and accountant when you are ready to start your business, so they can point you in the right direction.
- Free contracts and assistance from Legal Vision
- Quick and customisable legal resources and quotes from Lawpath
- Free consultations with Accountants and Solicitors available by appointment through the Business Enterprise Centre (BEC)
For now, you need an idea of the kind of structure you want because it makes a difference to how you financially operate your business.
If you’re operating as a sole trader, you don’t need to set up a separate bank account – but it’s still a good idea, so you can keep track of your finances. For other companies, you need to have separate bank accounts for tax and legal purposes.
This is important because it helps you easily track and control your expenses and income, as well as meet your tax reporting obligations easily.
With the admin stuff out of the way, it’s important to prepare a budget.
Activity 1: Understanding your operating costs
Ask yourself the following questions on the worksheet and record your answers. This is to get you started and to understand your operating costs.
Things to remember about budgeting:
Take your time to understand these costs and how they will affect your business. It’s also a good idea to speak to an expert like an accountant or bookkeeper about your potential costs – you can find an MYOB certified bookkeeper here. They can provide specialised knowledge about your industry and the daily obligations that you may not have considered.
Having this clear vision of your costs is all about budgeting for the future of your business so you won't run into any nasty surprises in the weeks and months ahead. Account for as many variables as possible and the chances of your business failing will reduce.
Whatever happens, when you take this part of the journey seriously and really break down what kind of money will be required for your idea, then you'll be financially ready for a sustainable business model that will go the distance.
The more you think about each individual cost and the more you write down every possibility, new opportunities will appear and you'll have an even better understanding about this important step of developing your business idea.
In the next lesson
We'll help you take your solid business idea and get it off the ground through networking and mentors.