Capital Budget Preparation before Opening Your Own Business

It's important to plan out your capital budget before opening your own business. It's erroneous to think that you can spend as much as possible, because you'll deduct it all when it comes to time to file taxes. Capital budget expenses cannot be deducted as a business expense for tax purposes. You might also end up with a business that's under-capitalized and cannot continue operations. Here's how to go about preparing your capital budget:

Start-Up Costs

The Internal Revenue Services considers your start-up costs as a capital expense, which you cannot deduct as ordinary and necessary business expenses. Therefore, it's important to carefully plan your start-up costs without any reliance on getting your money back by way of a tax break. Here are some questions to ask when budgeting your start-up costs:

  • Do I absolutely need this cost to get started, or can I wait?
  • Can my competitors live without it?
  • How will this start-up cost impact my personal budget and my ability to withdraw a salary to support my family?
  • What are creative alternatives to this cost, and will they work for less or no money?
  • Is bartering an option?

Too many start-ups strive to be too big too fast, and don't consider alternative options to the initial costs they're considering. Answer these questions first to determine how much to budget before you open your business.

Buildings

Purchasing a building is a large capital budget expense that may be your most valuable asset. However, buying a building is not a small matter and planning for it in your budget should take time and a lot of thought. Commercial buildings don't sell the same way residential homes do, and you have to consider this as you plan your exit strategy even before you open your business. Renting a building may be a better choice for your capital budget, until your business is proven and can pay for a building. Also, you can deduct rent payments for any buildings you rent, because it's considered an ordinary and necessary business expense.

Vehicles

A major capital budget item that you'll have to plan for is a vehicle. You'll have to decide whether to purchase a car exclusively for business use, or use a personal vehicle instead. When preparing this item of the budget, decide what you need to do based on how much money you have to allocate to all capital budget expenses, industry norm, your clients and customers and what you need to carry out your business tasks. For example, if you're a washer, you'll probably need a van to transport equipment and supplies to and from jobs. However, if you're a sales person, you don't need to buy a new car for the business. It might be nice to have and it may even enhance your image, but the expense of a new car may not be worth it or reasonable based on your personal circumstances, and it may destroy your capital budget.

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