Estimating Revenue and Costs for a New Small Business

When I opened up my small construction company several years ago, I had enough in the bank to fund initial start-up costs. What I didn't have was enough money to build my first couple of projects, which meant taking out a small construction loan. Before that could happen, the bank wanted to view my estimated revenue and cost figures for my first year in business.

So what exactly are costs and revenue? In very general terms, costs are the expenditures incurred in running a business, while revenue is the total income before expenses have been deducted. What my banker was asking for was a breakdown of costs for the upcoming year, total earnings and what sort of profit I would see when all was said and done.

Cost Estimation
Estimating your initial business costs starts with examining all the costs involved in starting your business and keeping it operating for the next six to 12 months.

To prepare an estimated cost sheet for my new business, I used a free worksheet from Businessknowhow.com/startup/startup.htm. This worksheet detailed all the expenses connected with opening a new business and listed ongoing costs that I could expect in the year ahead. Most of these costs were easy enough to figure out on my own, while others required a phone call to our suppliers and other vendors.

A simple worksheet like this is really all you need to project business expenses for the year ahead. What I like about using this particular form is that it very comprehensive and comes with a calculator to determine how much money would be needed to keep my business open in its first year.

Estimating Revenue
Estimating revenue for a new business owner can be tough to do since the numbers have to be based on a best guess.

--For those going into food industry, estimating a monthly revenue is based on how many meals you can reasonably expect to serve a day times 30.
--A business that sells widgets multiplies the amount of widgets that he can reasonably expect to sell in a month times 12 for a yearly estimate. A reasonable estimate can be determined by talking to other vendors and suppliers.
--Service industries estimate future revenue based on existing contracts. For example, a piano teacher with 10 students generating $1000 per month in revenue can expect a yearly revenue of $12,000.

It's important to understand that business revenue represents the total amount of money coming into a business before expenses have been taken out. Subtracting your estimated costs from your estimated revenue is what will provide you with an accurate picture of your business finances and how many more widgets need to be sold to turn a profit.

For more information about starting a small business, the Small Business Administration is a valuable, and free, resource worth exploring. Visit Sba.gov for information about the SBA's mentoring program, SCORE.