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Tips on How to Estimate Startup Costs for a Business Proposal

written by: nataliajones•edited by: Linda Richter•updated: 9/4/2010

Without figures to back up plans a proposal is just wishful thinking. This is why the question "how do you estimate startup costs for a proposal?" is extremely important to address.

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    FreeDigitalPhotos, money, graur razvan ionet A business proposal might sound completely achievable, and you may initially think you are witnessing the opportunity of a lifetime until you start to hear the details of the costs involved. The financial aspect of any proposal has the power to make or break the deal, so this element is extremely important.

    Since its importance cannot be denied it then becomes natural to look closely at the process involved in coming up with the cost that is eventually quoted. The question "how do you estimate startup costs for a proposal?" starts to gain prominence.

    There are two main ways to estimate the costs of any proposal: They are simply to start from scratch and to make a comparison of similar proposals and either add on or take off costs accordingly.

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    How Do You Estimate Startup Costs for a Proposal?

    Start from Scratch

    When estimating startup costs for a business proposal one way to go about it is to do research on all the elements that would contribute to the success of the business and then find the cost. This is no easy task and it can be very time consuming. These must all be summed up to find the cost estimate for the first year of the proposal, and these figures can also be used to find an average of profit or loss statements for a projected period.

    If for instance you are thinking of starting a retail business and you need to estimate the cost of your business proposal you would make a list of all your inputs and find the associated costs. Your list might include rent, electricity, your cost of goods or raw materials, any staff that need to be hired, the salary you would pay yourself, as well as advertising costs and the cost of financing if you need to borrow money to start the business. To find these individual cost estimates you would have to research each area.

    The Comparison Approach

    The comparison method is a much more user-friendly approach to estimating the cost of a proposal simply because it uses information that is already there and simply goes about comparing potential differences in cost. Unless a proposal is completely novel in its content and scope, you should be able to find a project that is similar enough to be used as a baseline. The comparison project proposal acts as the bottom line from which all adjustments are added to and subtracted from to arrive at the new cost estimate. This approach usually takes less time because it allows the entrepreneur to take the cost of entire expense categories as an estimate without going into the details of searching for the cost from scratch. This method also brings with it the disadvantage of accepting all the pre-existing assumptions of the comparison proposal, and in some cases there may be too many adjustments to make this approach feasible.

    To start the same retail business described above you can find the estimated cost using the comparison approach buy sourcing a similar business plan with cost estimates. However, you would have to adjust the figures used to allow for differences. One example would be changing the estimates for the rental expense to make up for differences in location or the size of the space used. In fact each expense category may be slightly different.

    The bottom line is that startup costs can either strengthen a proposal or put an end to dreams of moving to the next phase of development, so it is important to get it right.

    Image Credit: Free Digital Photos.net, graur razvan ionet