Before deciding to set up a Social Enterprise, it is essential that you consider the initial costs involved and you work out your estimated expenditure. If this is not done then the new Social Enterprise could fail to get beyond the start-up phase.
Why is it important to work out start-up costs?
It is important to know whether you can afford to start your Social Enterprise and knowing the start up costs is vital. It will also help you when you ask for funding from:
- Funding Bodies
- Friends and Family
It is better to ask only once for start up costs as this helps to develop a positive image for the Social Enterprise.
The process of working out accurate start up costs can be a useful method of deciding whether the business idea is viable.
Why must all start-up costs be included?
Underestimating start up costs may result in the Social Enterprise being less profitable than expected. It may even be the deciding factor in whether the business makes any profit in the first year or two. This in turn may mean that additional funding must be sought. The last thing anyone wants to do is to invest time and money in a Social Enterprise that will never give an acceptable return.
Is it better to overestimate start-up costs slightly?
Yes: including some contingency money in the start-up and operating budget projections is wise as there are always unexpected expenses. Underestimating costs can be just as disastrous as making overly optimistic sales forecasts.
What start up costs should be included?
- Premises rent rates, refurbishment etc
- Stock perhaps
- IT and other equipment
- Office furniture
- Business stationery and office supplies,
- Marketing items such as leaflets or launch adverts
- Website development
- Travel and transport
- Heat and light
- Phone and internet charges
- Professional fees including Company registration, Legal accountancy
- Wages including income tax, National Insurance and pensions
Note there are two types of costs both of which should be considered
- Fixed: A cost that does not vary depending on production or sales levels, such as rent, property tax, insurance, or interest expense
- Variable: A cost of labour, material or overhead that changes according to the change in the volume of production units.
Is there a need to retain proof of all expenses?
Yes: To claim tax relief (and VAT if applicable), the Enterprise must have a valid (VAT) invoice and retain all sales receipts. If the Social Enterprise makes a claim for tax relief that cannot be supported by a valid invoice/receipt, HMRC can ask for the tax back, plus interest. Seek accountancy and legal advice to determine what the Enterprise can claim for and make sure to retain proof of all business purchases.
Why should start-up costs be minimised?
The Social Enterprise stands a better chance of making a profit – or even just surviving, if starts up costs are controlled. Also, it’s a good discipline to get into from day one. Remember in business operating costs should be kept as low as possible and avoid the temptation of buying things the Social Enterprise does not need e.g. the Rolls Royce Company car. Chances of long-term success are much greater if the Social Enterprise has a low, but well considered,cost base.