Q&A - Why does a start-up often find it hard to estimate costs?

A business start-up is faced with the challenge of estimating what the costs of setting up and operating the business will be. It is not always easy.

Some costs are pretty straightforward to estimate – most of them are in the “fixed cost” category.

For example, a business that rents its location (e.g. a shop unit, a room in a shared office complex) will know what the cost will be. It is easy to get a quote from the landlord before signing the lease.

Some basic market research will soon tell the entrepreneur what is will cost to design, print and distribute some marketing leaflets. A call to the newspaper or Yellow Pages will quickly get a quote for the fixed costs of an advertising campaign.

Wages and salaries are also pretty easy to estimate. The entrepreneur knows what he or she is prepared to pay and the actual amount will be agreed in the employment contract. An entrepreneur can control hourly wages by restricting the amount of overtime available.

In terms of variable costs, cost estimation becomes a bit harder. It is easy to get quotes for the price that has to be paid for raw materials and components. However, it might be that the business does not operate efficiently – for example suffering a high degree of waste. That would increase the average cost per unit produced.

Another problem comes when an entrepreneur enters a market in which he/she has little or no experience. For example, the business may discover that there are hidden marketing costs (e.g. commissions) which need to be taken into account. Sometimes the start-up business plan simply misses out a cost category due to inexperience or lack of care in putting the plan together.