When you begin dreaming about working in your own professional office space, you’ll likely have visions of trendy layouts, colorful walls, and ergonomic chairs. You’ll imagine yourself tossing a ball around with your team while you brainstorm ideas and impressing clients with gourmet coffee. Hey, maybe there will be a foosball table!
It’s great that you have big dreams, but in business, everything boils down to one factor: cost. Before you start visiting properties and signing paperwork, you have to understand what you can afford.
Evaluating Your Budget
Ideally, you should have a thorough business plan that projects your expenses over a few years. A business plan is a fantastic document that not only gives you an overview of your company now, but makes educated predictions about what your company will look like in the future.
But if you’re a little less prepared, don’t fear. You’re in the same boat as many entrepreneurs. In fact, U.S. Trust found that “A large number of business owners have not articulated a strategy…” All you need is a careful understanding of your budget.
(I’m going to give a basic budgeting overview, but Info Entrepreneurs has an excellent guide.)
Step 1: Calculate your income
Gather all information about monthly income you can depend on. In this category, you should round all of your numbers down. Use worst-case scenarios.
Don’t use last year’s numbers. Use what you can expect next year. For instance, if you made $25,000 at a trade show, but don’t plan to attend it this year, you wouldn’t calculate that as income.
Step 2: Calculate your fixed costs
Add all of the costs you expect each month. This category includes salaries, licensing fees, insurance, fees, web hosting, and anything you’re paying for your current workspace.
Step 3: Calculate your variable expenses
These are expenses that may change each month. It includes items like utility bills, material costs, commissions, marketing costs, travel, equipment rental fees, etc. Most of these expenses scale up or down with your sales, so when the bills get higher, you’re also making more money.
Step 4: Predict big expenses
This is tough, but necessary. Consider any big purchases you’ll have to make within the next few years. You won’t be able to predict everything (like a broken computer, which will happen unexpectedly), but new hires or equipment usually have some lead time.
Distribute these expenses into the months leading up to the purchase. For instance, if your expenses total $5,500/month and you have a $2,000 purchase coming up in six months, your actual expenses are $5,833.33 per month for the next six months.
Step 5: Look at the big picture
Now that you know where your money is coming from and where it’s going, put everything together. How much is left over each month after your expenses are covered? This is how much you can spend on growth, including new office space. Ideally your income will grow over time, so your office space will eventually require a smaller percentage of your income (although it should never be more than 10%).
Keep in mind that was just a light overview. Business budgeting can be a complex process depending on your unique situation. However you do it, just make sure you know how much money you have available before you begin looking at potential office spaces. It may seem obvious, but many business owners fail to make these calculations.
The Hidden Costs of Office Space
If the lease and utilities were the only costs you had to consider, office space would be quite affordable and available to more people. Unfortunately, your costs don’t end there. There are some significant hidden expenses that many new lessees fail to consider.
1. Office furniture
People need to sit, right? You’ll need desks and chairs, which can add up quickly depending on the models you choose. If your staff sits for long periods of time, you can’t buy poor-quality chairs or they’ll quickly complain of back problems. Sure, you can buy cheap or snag free furniture off Craigslist, but it likely won’t last long.
2. Office supplies
Even if your team has always worked remotely and paid for their own expenses in the past, they’ll expect you to provide office supplies once everyone moves into the office. These are recurring expenses you should plan for every month. Your team will need basic items like pens, calendars, printer paper and ink, mouse pads, highlighters, etc.
Your staff used their home computers before, but they won’t be willing to haul their desktops to work every day. You’ll have to invest in new machines to keep the work moving. If your technology needs are high (like drafting equipment, servers, or 3D printers), you may have to pick up new units.
4. Move-in expenses
Depending on the equipment you need, moving in might be a challenge. You may have a few desks, chairs, or maybe a copier sitting around your garage. You can save money by using what you have, but getting to your office space might require renting a truck.
5. Liability or property insurance
Anticipating lawsuits are a part of doing business. Many landlords require the lessee to take out insurance with the lessor named as the additional insured. Since you won’t be doing anything industrial, this won’t be terribly expensive, but it’s a cost many businesses fail to consider.
6. Property taxes
Many leases require the lessee to pay a prorated portion of the site’s property taxes. (If this isn’t listed as its own line item, it’s already been rolled into your rent.) Make sure you’re aware of this charge (and all other charges) before you sign the lease.
7. Common area fees
If your office space shares common areas with other businesses on the site (like parking lots, bathrooms, or waiting areas), make sure you understand the fee structure and how you benefit. You don’t want to be surprised by a hefty fee for a shared receptionist you don’t intend to use.
8. Overtime utilities
In many leases, the utilities are included in the rent as long as they are used during normal business hours (typically set as 7 AM to 6 PM). If you use power, water, gas, or oil outside of those hours, you’ll pay additional fees. If you have a charge like this, make sure you understand how it lines up with your working hours.
9. Communication services
Telephones, Internet, and cable services are rarely included under utilities, although many lessees make the mistake of assuming they do. You’ll have to cover these costs yourself.
Think About the Future
When you lease office space, you’re investing in the future of your company. Naturally, you expect the business to grow, make more money, hire more people, and generally get bigger.
But in most cases, your office space won’t.
Sure, some locations offer nearby units you can grow into. Maybe there’s room for construction and expansion. But the building owner isn’t going to hold that space for you. There’s no guarantee the extra space will be available when you need it.
Before you sign the lease, think about your future. In what ways will your company grow? Will you need more space for people or equipment (both have different needs in space)? Will you need to switch from an open layout to closable offices? Will you need a reception area?
Most importantly, think of your future cash situation. How will growth affect your cash flow? For instance, maybe penetrating a new market will tie up all your cash, so it’s best to sign a smaller lease than you can afford right now.
There are spaces nearby that you probably aren’t aware of. If your budget feels tight, remember that there are all sorts of office types available. You don’t have to rent a large, elaborate space with a complex, tough-to-negotiate lease. A turnkey unit (with furnishings and a hassle-free rental agreement) might be just the thing your growing business needs.