Image credit: Kari Geha Photography

Operating Expenses: Estimating Cost to Start an Engineering Firm

Whether you're starting a consulting business or engineering firm, you need to ascertain all costs associated with your venture. To help you estimate how much it will cost, we’ve outlined what you need to consider below.
By Hazel Nguyen | 8 min read
on April 15, 2020
Image credit: Kari Geha Photography

If you’re an owner of a small engineer consulting firm, it’s a must that you understand the costs of operating your business.

The first thing to do when you are considering the cost to start an engineering firm, you should consult the experience of any people who start-up before, it will be very helpful for you. The experience of opening a company from previous people will be extremely valuable lessons. Thorough research will help you take advantage of more opportunities in business. That will help your business more easily succeed in the future by being oriented to establish an engineering company from the beginning.

It is easy to open an engineering firm, but how to gain experience to maintain it requires a clear and methodical business strategy. Especially for setting up an engineering firm, you need to have a specific capital raising plan, business registration, selection of legal representatives, business partners, markets, and the most important: financial management.

Financial management is essential to the success of a startup or an entrepreneur: a company that does not grow will not survive. Estimating the cost to start an engineering firm is a step that can help you thrive in this economy.

This is where measurement work comes in. Answering the question: How much money will it take to start your small business? Calculate the startup costs for your small business so you can request funding, attract investors, and estimate when you’ll turn a profit.

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Identify Your Engineering Firm Expenses

You’ll face different startup expenses depending on your business types such as brick-and-mortar businesses, online businesses, and service providers. With the cost to start an engineering firm, you need to consider these expense:

#1: The Business Plan

The first step to opening up any business is creating a detailed map of the new business. With a business plan in place, it will be easier to identify the different start-up costs involved. A business plan forces consideration of the different startup costs. Underestimating expenses falsely increase expected net profit, a situation that does not bode well for any small business owner.

#2: Research Expenses

Careful research of the industry and consumer market must be conducted before starting a business. Do not blindly jump into it. You can talk to others that have started a similar business and do further research on the needs of your business. With easy access to the Internet, this step would be incredibly easy and effortless. These are the cheaper options. market research firms to aid them in the assessment process.

However, if you have doubts and you want to be sure with professional insight, some business owners choose to hire market research firms to aid you in the assessment process. For business owners who choose to follow this route, the expense of hiring these experts must be included in the business plan.

#3: Financing Costs

Starting up any kind of business requires an infusion of capital. There are two ways to acquire capital for a business: equity financing and debt financing. Usually, equity financing entails the issuance of stock, but this does not apply to almost small businesses, which are proprietorships.

For small business owners, the most likely source of financing is debt in the form of a small business loan. Business owners can often get loans from banks, savings institutions. Like any other loan, business loans are accompanied by interest payments. These payments must be planned for when starting a business, as the cost of default is very high.

#4: Insurance, License, and Permit Fees

Many businesses are expected to submit to health inspections and authorizations to obtain certain business licenses and permits. Some businesses might require basic licenses while others need industry-specific permits

Carrying insurance to cover your employees, customers, business assets, and yourself can help protect your assets from any liabilities that may arise. 

#5: Equipment and Supplies

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Image credit: Press associate

Every business requires some form of equipment and basic supplies. Before adding equipment expenses to the list of startup costs, a decision has to be made to lease or buy.

The state of your finances will play a major part in this decision. If you have enough money to buy equipment, unavoidable expenses may make leasing, to buy at a later date, a viable option. However, it is important to remember that, regardless of the cash position, a lease may not always be best, depending upon the type of equipment and terms of the lease.

#6: Marketing and Promotion

A new company or startup business is unlikely to succeed without promoting itself. However, promoting a business entails much more than making press release.

It also includes marketing—everything a company does to build trust and authority. This effort would attract clients to the business. Marketing has become such a science that any advantage is beneficial, so external dedicated marketing companies are most often hired.

#7: Employee Expenses

Businesses planning to hire employees must plan for wages, salaries, and benefits, also known as the cost of labor.  Failure to compensate employees adequately can end in low morale, mutiny, and bad publicity, all of which can be disastrous to a company.

Estimate how much your expenses will cost. Once you have your list of expenses, you can estimate how much they’ll cost. This process will be different for each expense you have.

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Naming The Common Costs You May Meet

Some expenses will have well-defined costs — permits and licenses tend to have clear, published costs. You might have to estimate other costs that are less certain, like employee salaries. Look online and talk directly to mentors, vendors, and service providers to see what similar companies pay for expenses.

One of the most important parts of the financial data that you are the founder must know is the total cost of running your business. The total cost of running your startup includes the fixed costs and the costs incurred.  Once you’ve identified your business expenses and how much they’ll cost, you should organize your expenses into one-time expenses and monthly expenses.

One-time vs. ongoing costs

One-time expenses are the initial costs needed to start the business. Buying major equipment, hiring a logo designer, and paying for permits, licenses, and fees are generally considered to be one-time expenses. You can typically deduct one-time expenses for tax purposes, which can save you money on the amount of taxes you’ll owe. Make sure to keep track of your expenses 

If there's a month when you must make a one-time equipment purchase, your money going out will likely be greater than the money coming in. This means your cash flow will be disrupted that month, and you will need to make up for it the following month. Ongoing costs, by contrast, are paid regularly and include expenses such as utilities. These generally do not fluctuate as much from month to month.

Fixed cost

A type of cost that does not change with the production volume of the business, meaning that the cost will remain the same regardless of the production of additional goods and services of the business. Fixed overhead expenses are costs that stay the same every month and don’t change with business activity. They include rent or mortgage payments, utilities, insurance, property taxes, depreciation of assets, annual salaries, payroll costs, and government fees

For an engineering firm cost structure, fixed costs may be administrative overhead, while variable costs may be employee wages, bonuses, payroll taxes, entertainment and travel expenses.

Variable cost

This type of cost varies according to the volume of production of an enterprise, which can fluctuate according to the price of a product or service it produces. This cost increases or decreases according to the production situation.   Variable costs are affected by business activity and can increase or decrease from month to month. They include administrative business overhead costs such as shipping, legal expenses, office supplies, equipment maintenance, marketing, and consulting fees.

For example, the cost of raw materials directly on the product, direct labor costs, commission costs or server costs.

Know The Cost Structure

Cost structure refers to the set-up of fixed and variable costs carried by a business, which can be broken down by cost groups and relative proportions of costs that a company takes on. The cost groups can be determined by product cost structure, service cost structure, product line cost structure, customer cost structure, and even individual projects or customer segments. Each of these cost groups will have certain fixed and variable costs. It is very important for you to consider, especially with the cost to start an engineering firm.

The value of understanding cost structure for an engineering firm is that it can be used to define product prices relative to a defined pricing strategy, as well as determine areas in which business costs can be reduced without impacting revenue stream. A core concept of cost structure is that it needs to define every cost incurred concerning a cost group; for instance, key spending areas that impact overall growth – including the cost of goods sold, research and development, sales and marketing, and administrative expenses.

Figure Out Your Financing Methods

Once you've determined your costs and cash flow projections, you'll need to consider how to pursue financing. How you obtain funds will affect the future of your business for years to come. Personal savings, loans from family and friends, bank and government loans, and grants are just a few of the many potential funding sources. Many companies use a combination of sources.

These all incur costs to the business, and so gaining a complete picture of your cost structure – knowing which strategies are working and where the business should focus spending to maximize growth going forward – is a key ingredient to scalable growth.

Tips when first starting

As stated above, a few simple rules can save a lot of headache and money when starting a new business independently. Consider the following suggestions that have been cultivated from a variety of engineers who have pursued their entrepreneurial dreams.

  • Make a list. Every business and every engineering firm needs certain basics. Put everything needed on one list, what’s wanted on another, and what would be ideal on a third. Start by buying only what is needed.
  • Keep overhead low. Don’t rent a fancy office. Embarrassed by the bargain basement look of your office? Then arrange face-to-face meetings with clients at a local café or restaurant. Alternatively, handle them via email or video conferencing. Buy second-hand office furniture. Put money into necessities, not surroundings made to impress.
  • Pay for good tools. Get a top-of-the-line computer, a 3D printer and high-speed internet. Invest in the right equipment and materials to make prototypes. Money spent on these items helps to deliver a finished product that will help facilitate an excellent reputation and more clients.
  • Consider the co-working space. Check out co-working setups that have the necessary equipment and machinery for your specialty. Typically, the rent paid includes the use of on-site equipment.
  • Find a good accountant. Interview accountants to do the books and taxes. If you don’t have a handle on your money, you won’t be in business long.
  • Take classes. Graduation from college doesn’t mean that education is over. Take an accounting class. Find courses on how to put together an accurate quote and how to manage a project from end-to-end. As a business owner, skills are need beyond those strictly related to engineering.
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Image Credit: Press Association

Save Money With Digital Transformation

The engineering and construction industry is at the cusp of a new era, with technology start-ups creating new applications and tools that are changing how companies design, plan and execute projects. By providing advanced software, construction-focused hardware, and analytics capabilities, these innovative start-ups are eliminating many of the problems that have dogged the E&C sector for decades, including difficulties compiling and sharing project information. Such improvements could not come at a better time, since construction projects are becoming increasingly complex and expensive, putting managers under greater pressure to improve costs, timelines, and efficiency.

Project management apps make collaboration easy. Users can leverage the power of engineers working in other parts of a building, other cities, and even other continents through the cloud. All of this brings big-firm capabilities to one-person operations on a shoestring budget. Out of necessity, small firms often need to partner with other engineers for the expertise and to handle concurrent projects and deadlines.

A few clicks on a management dashboard are all that is required to schedule a task, check where it is in the timeline and assign new tasks. These apps are generally affordable, even for one-person operations.

Communication costs can also be minimized through the use of email, online video conferencing, instant messaging, tools like Skype, and social media. The days of exorbitantly priced long-distance and international calling plans have gone the way of the Dodo bird.

Collaborative, robust design tools make it simple for engineers and others on the project to work on jobs together in real-time wherever they live. With all collaborators seeing the same design version at the same time, accuracy improves. Through cloud-based apps using a SaaS model, even engineers with a tiny budget can afford them.

Engineers can also independently create prototypes using 3D printers. These printers are somewhat costly, but online services such as 3D Hubs allow users to find local 3D printing resources from around the world.

The Bottom Lines

Launching a new engineering firm will simultaneously be scary, thrilling, and liberating. At times, entrepreneurial engineers question why they ever chose to leave a stable and salaried job to instead spend nearly every waking moment worrying about business administration, licenses, rent, and a litany of other issues beyond their old job responsibilities.

However, the freedom that eventually comes with having no one to answer to but one’s self is unique to the entrepreneur. For many, it makes all the blood, sweat, and tears associated with the start-up years very worthwhile.

Getting start-up help is easy as there are so many free resources around. Whatever business you are thinking of starting, the industry will generally have a professional body managing the interests of their members offering help and advice to you.

This article is also credited to Investiopia.

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