Determining Overhead for Your First Brick-and-Mortar Business
There are many good reasons to have a traditional brick-and-mortar location, even if you already have a successful e-commerce store. In fact, retail distribution giant Amazon is opening physical stores throughout the nation to increase its customer appeal and market penetration, The New York Times reports. But opening up a brick-and-mortar store can be a large, financially taxing undertaking, so it’s important to know what your costs will be and how to handle them before making the leap. Here’s what you need to keep in mind.
Capitalizing vs. Expensing
To start your new store, there are going to be some big-ticket items that you will need to purchase or lease. How you handle these will reflect on your financial statements which you will use to get loans and secure investors. Let’s use the purchase of a building as an example (but know that this is also true for other things like an automobile or a large software suite). If you buy a building for $100,000, you can either capitalize it or expense it. If you capitalize it then it will not show as an expense for this year and will be listed as an asset. Your books will record higher income — on which you must pay taxes — and an asset worth $100,000. If you expense it, the year’s income is lower — saving taxes — but you do not have an asset, which is favorable to investors. You will need to pick one or the other and stick to it.
Some things will only be expensed. These are generally one-time purchases to get everything that you need to run your store and typically cost under $1,000. A security camera system to keep the store safe, office supplies to keep it running and decorations to make it look nice can all add up. It is best to do a budget then add on 25 percent for a contingency. You may want to open a line of credit, generally established against your home, so that you have the cash to make the startup purchases.
Maintaining Cash Reserves
As your business gets going, you do not know what might happen in the future, like a sudden need for new employees to help with the high demand or a deposit for a new supplier because your regular one went out of business. To keep your business in a positive cash flow, you will want to maintain cash reserves. Any left over money from the startup line of credit can be used as contingency funds. You will also want to keep reserves in the bank that equal one month of operating expenses. For seasonal businesses, take the highest expense month as your reference.
Reoccurring Expenses and the COGS
You should have a business plan for your new location, and part of this plan should be a budget that is linked to the cost of goods sold (COGS). Some of these reoccurring expenses will be fixed, like rent, salaries and utilities, and you have to pay them even if you do not sell a thing. Others are variable, depending on the sales. Inventory, bags for the customer to carry the purchase or shipping boxes are all part of COGS, and change depending on the number of items sold.