Tax Q & A for Small Business Owners
- May 14
- 9min read
Any project undertaken within business organizations intends to make a profit out of it. And to predict the profitability of a project, it is essential to predict the potential costs that would be incurred. Creating a project budget is an extremely critical step in making investment decisions.
Now different projects would incur different types of costs, but broadly speaking, the following cost considerations are ones that you need to make:
1. Cost of Raw Material
If you are setting up a manufacturing project such as a production plant, there will be a raw material supply linkage that you will need to create. Different vendors for the same raw material will offer you different rates. Moreover, due to inflation, raw material costs will tend to vary over time. Ensure that you factor in such aspects while estimating the cost of raw materials for the project.
2. Machinery Costs
Again, for most production plants as well as manufacturing units, you would need to procure machinery. This could form a considerable part of the project cost, although it would be a fixed and non-recurring cost. While estimating the machinery cost, it is also essential to factor in maintenance costs. Another aspect to consider is the overhead costs of operating the machinery –fuel or power costs which would be variable.
Remember that for raw material and machinery, you also need to consider logistics costs as you will incur expenses on their transportation.
3. Salaries and Wages
You will need to make payments to your employees and any contractual labor you would need to hire to execute the project. Again, this would form a significant chunk of the project costs. Depending on the length of your project, you might also want to factor in due increases in the wage bill.
4. Land and Office Costs
You might have to rent land to set up your project and office space to provide your employees with a space to work from. And both will form part of the recurring costs on the project P&L.
If you purchase land and office space outright, it would be a one-time fixed cost, although it will be several times the rental price. If you make such outright purchases, land and office properties can be recorded as fixed assets on your balance sheet. The cost will not impact your P&L. However, the cost of outright purchase is often prohibitive, and you would also have to incur higher costs as the absence of rental expenses would increase your EBITDA.
5. Financing Costs
Most capital-intensive projects are funded at least by leverage and plowing back of past earnings. Aside from such long-term debt, you might also have to take on working capital loans to fund your operations. Such debt must be serviced every month, and therefore, you need to make consideration for the same.
6. Administrative Costs
Every project will incur costs peripheral to core business activity, such as the cost of admin executives, project management and ERP software, stationery, licensing costs, insurance premia, legal fees, and so on. While such costs are usually insignificant, they must be accounted for while budgeting for a project.
7. Contingency Funds
While executing a project, not everything will go exactly as per plan. There will always be inevitable equipment damage, accidents, and injuries causing material loss and requiring medical attention, project delays, and so on. It is therefore essential to keep some funds in reserve for such contingency purposes.
Remember, if you are planning to rent office space temporarily only to serve as a meeting space for your employees to coordinate for the project, it makes more sense to opt for a virtual office virtual office. With a virtual office, you can book space as needed by the hour. Thus, if the majority of your staff will spend their time on the project site, you need not rent a large office space. A virtual office will also help you cut administrative costs, as you can hire the services of a receptionist whenever necessary. If you think virtual offices are a suitable option, feel free to contact us.
