By Karen E. Klein Q: How do I determine startup costs for a health club targeting clients with heart disease, diabetes, hypertension, and obesity?
---- C.P., Davenport, Iowa
A: Determining startup costs for a business, like putting together any pro forma or budget, takes research and common sense. Since a health club for clients with special needs probably isn't terribly different from any other health club, start your research by taking tours of several local clubs. As you walk through, take mental notes: Is there a reception counter and receptionist? What kind of equipment is used to log members in and out? Identify other activities, such as weight training, aerobics classes, treadmills, stationary bicycles, and the like. How many staff members are on hand, what are they doing, and what kinds of equipment are they using?
If you can estimate their costs, then you can modify your health club's costs accordingly. Two of your biggest initial expenses are going to be leasehold improvements and equipment costs, so estimate an initial size for your club and then consult with an architect and/or general contractor to determine what your tenant improvements are going to cost. Make up an equipment spreadsheet, and research costs from the manufacturers or from the local clubs that you are benchmarking your club against. "You'll need to ask a lot of 'innocent' questions of other club owners, managers, and employees," says Jonathan Goldhill, a Los Angeles small-business consultant.
WISHFUL THINKING. Accurately forecasting startup costs is crucial -- "as important as a pilot having sufficient fuel before flying over the ocean," notes Altadena (Calif.)-based small-business consultant Phil Holland. For better or worse, entrepreneurs are born optimists who tend to be unrealistic about their prospects -- and naive about expenses. Studies show that business owners' actual first-year revenues fall significantly below even their most pessimistic business-plan projections. The resulting shortfall can lead to unexpected cash outlays, missed payments, an inability to get additional funding, and ultimately business failure.
Zero in on a sales figure by talking to people in your industry, talking to customers, and using your own knowledge, says Kathleen Allen, a professor of entrepreneurship at USC's Marshall School of Business. "When you forecast sales, be sure to consider things like seasonality and repeat purchases. Calculate how much you will spend, including the costs you'll incur before you ever open the doors to the business....And don't forget taxes," she says.
FAT RESERVES.No one can forecast expenses and income with pinpoint precision, but it's important to be as accurate as possible. Using your most pessimistic estimates for income and a heavy pencil for expenses, come up with the date when your business will achieve positive cash flow. Plan on amassing enough operating capital to cover your losses up to that point, and add a safety net totaling at least six months of fixed costs to carry you in case something unforeseen occurs.
In your case, you'd be well served by finding an accountant, consultant, or partner who knows the health-club industry. Check out Holland's Web site, www.myownbusiness.org, for free information on preparing your business plan and projecting future cash needs. Better yet, get a job at a club yourself, and work there long enough to really understand the business and how the finances work. You'll learn the economics of the business from the inside out -- even if you're just handing out towels. Have a question about running your business? Ask our small-business experts. Send us an e-mail at firstname.lastname@example.org, or write to Smart Answers, BW Online, 6th Floor, 2 Penn Plaza, New York, NY 10121. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.