get the numbers right
A list of five things that fresh entrepreneurs usually forget in their initial calculations.
We have listed out five costs that entrepreneurs generally miss while performing feasibility analysis for their venture. We have come up with the list from our observation and experience while working with different startups in Nepal. Nonetheless, we must admit that the list is a ‘generalization’, and we advice a certain amount of discretion depending on the type of venture you are involved in. Let’s get started.
1. Human Resource
It’s difficult to attract talented team members to work for a startup, as usually new startups do not hold a branded image of ‘good place to work’ like big businesses. That means you need to pay above average money to make people work for you, unless you offer them a stake in the business. However, if your nature of business needs ‘highly technical’ people, for example chef for a restaurant or financial analyst for an investment company, then they will be asking for a decent amount, which you probably haven’t made yet. Hence, calculating HR costs at average market rate would only inflate the projected profitability.
Costs concerning compliance include business registration cost and other regulatory requirements, such as setting up internal control system, accounting and legal advisory, to name a few. Admittedly, these costs are not associated with the core business processes, and for that reason, most entrepreneurs do not consider them while assessing the feasibility of their ventures. However, as the company starts growing, compliance costs are bound to increase.
3 Office Operation
Ventures might add costs of rent, water, electricity in their ‘expense’ list, and accordingly they allot a sum of money for that. Nevertheless, in almost all the cases, these office overheads cost much more than the estimates. For example, if you are using electricity during normal hours, it costs around Rs. 10-12 per unit. However, during load-shedding hours, electricity can cost up to threefold that amount. And if your business is energy dependent, then it can create major dent in your financial estimates.
It is another source of hidden costs that is not generally taken into account before the work has started. Businesses need to pay taxes regardless of their size and nature, and it’s not just income tax that they have to pay. There are plenty of other taxes that companies are liable to pay, like TDS (Tax Deducted at Source) in payment to employees and suppliers, and rent taxes, to name a few. Additionally, if the nature of business requires it to be registered under VAT, it can greatly impact your pricing decisions.
5. Opportunity Costs
One school of thought says that entrepreneurs don’t have opportunity cost because it’s her business and she earns dividend. However, our take on it is that entrepreneur, at least during the initial stage, also act as a manager of the business, and for that managerial role she needs to be compensated. Hence, to assess the actual financial feasibility of the business, a reasonable remuneration that entrepreneur would have earned elsewhere should also be included.