Thursday, January 22, 2015

Can your company afford an Office or a Coffee Shop?

While the coffee shop has gained popularity over the past many years or so, most businesses, if given the option, prefer to have an office, a home base.

But most entrepreneurs and business people don't connect the cost of an office or retail space with any business analysis.  Sometimes its just a gut feel; yes, that's seems like a reasonable amount to pay.

The best way to analyze the cost of an office is a very simple calculation.  

What is the percentage of your total annual rent divided by your  gross annual income?

For example, if monthly rent is $500.00 or $6,000 per year, divided by an annual gross revenue of $100,000, then the percentage of rent vs. income is 6%.  This is average for retailers. 

The formula could also be used to draw a comparison of rent expense to your other expenses, such as advertising.  

If you use the percentage method, you can use between 6-8% to see if you are currently making enough to support an office.  So if you are grossing $50,000/year, you can afford an office expense of between $3,000-$4,000 annually or $250-$333 per month.

For office users with larger staffs, sometimes a per employee figure is used, which will differ based on type of building, amenities and which market you are located in.  

So if $200 per employee is used, and you have 3 employees, you should look at rent of approx. $600/mo.  And this is why you see incubators, shared offices and executive offices offering an individual desk monthly rent cost of around $200.

Which means that if your company is not generating or does not have approx. $120,000,($600/mo x 12=$7,200/.06=$120,000)  then you will burn through cash faster by renting too much space.

Use both methods or research recommendations on rent vs. revenue and cost per employee calculations to see what is right for your situation.

This is a key factor that is overlooked in most start-ups and professionals business planning.

Brought to you by The Alternative Finance Exchange

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