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What are Preliminary Expenses?
Mary McMahon
Mary McMahon
Preliminary expenses are costs people incur in the process of opening a new business. Also known as pre-opening expenses, they can vary, depending on the nature of the business. People developing a business plan for a new business must consider preliminary expenses and sources for funding, as they need enough money to open the business and keep it open while a client base begins to be established. Failure to anticipate these costs can result in a business failure shortly after opening.
Things that must be considered when creating a preliminary expenses estimate include facilities, equipment, early payroll needs, attorney fees, registration fees, and investments in initial inventory. These costs can rack up quickly and unexpected expenses may surface while opening a business, requiring people to create a cushion in an estimate so these costs can be absorbed without completely derailing a business plan. A business might, for example, need to make extensive repairs to the electrical system in a facility before opening.
In the process of estimating preliminary expenses, people can consult other businesses, accountants, and references designed for business owners. Many municipalities offer basic budgeting guidelines for businesses to give them an idea of startup costs for similar businesses in the area, on the basis of reporting provided by existing businesses. Books with information to help people get a new business off the ground can also cover common expenses and provide information about adjusting them by region to get the best possible estimate.
People usually need to seek funding from outside sources for preliminary expenses, unless they are independently wealthy. This can include approaches to investors, asking for capital in exchange for a share in the business, along with applications for loans from banks and other financial institutions. The cost of servicing loans and investors is also an important factor in operating costs that cannot be left out when determining how much money a business needs to get started and stay open while it starts turning over a profit.
Depending on the industry, businesses may be able to recoup their preliminary expenses very quickly, or it may take a longer period of time. Restaurants, for example, often remain indebted for the first year or more because the initial outlay of cash is very high. Once the business starts turning a profit, the owners can consider investing in new opportunities to expand and keep the business as up to date as possible.
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
Learn more...
Mary McMahon
Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.
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![All expenses incurred in the formation of a new business are considered preliminary costs.]()
By: mangostockAll expenses incurred in the formation of a new business are considered preliminary costs.
Discussion Comments
Believe it or not, in this age of virtual economies, not all businesses have much in the way of major business expenses – at least not in terms of infrastructure.
I once worked part time for a company that did all of their work online. All the workers communicated via instant messaging, and the employees were scattered in different places across the United States. Of course, they had expenses in the way of money they paid to employees, but that was covered under an existing revenue stream.
Online service businesses are unique in this regard. You can work as an independent contractor providing all of your services online, such as being a web developer or freelance writer, and the only expenses for business operations of this kind are your Internet connection, usage of electricity, any online advertising and depreciation of computer equipment.
If you are starting up a new business and are putting together a business plan to secure funding for your venture, how much do you think you should over estimate your preliminary expenses?
I have pretty much tried to think of every possible thing I could need, and have a very detailed budget for my business plan but worry my bank may bring up some things I hadn't thought of before.
Do you know if there is a place or service you can use that will review business plans before they are submitted?
I would love to have someone take a look at mine and give me feedback.
Starting up a new business can be an exciting and stressful time for those who are hoping to make it in their field of choice. I have found that speaking with someone who has opened a business similar to yours in regards to preliminary expenses can give you a great idea of what to expect from the opening process.
If you don't know anyone off hand and aren't willing to cold call people in your field there are numerous online forums for pretty much every business under the sun.
I think it is a good idea to learn about preliminary expenses there and see what others have learned. Better to read about another person's mistake before making it your own.
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