How to Calculate Explicit Cost
Explicit costs are the total costs an entrepreneur spends when starting a business. It can include anything from machinery, salaries, rent and loans. Explicit cost differs from implicit cost, which is the opportunity cost for starting the business. Implicit cost examples would be the entrepreneur's salary at his last job, or a portion of a workday spent on training.
The explicit cost of a entrepreneurial project depends on the type of project in question, as businesses differ in terms of sector and type. To calculate explicit cost, calculate all of the business' startup costs.
Calculate the cost of the business start-up loan, if applicable. This cost is not the principal of the loan, but the interest. Remember that most loans compound interest, and thus the rate you pay in the end will actually be higher than the rate quoted by the lender. To compound the interest owed, first divide the interest rate, in decimal form, by the total number of months the loan will likely remain outstanding.
Then add by one, and raise this value to the total number of outstanding months. Subtract by one to obtain the compounded rate of interest.
Calculate the total amount spent on employees, if applicable. This is net of any deductions, such as pension plans and other benefits. Remember to account for any potential increases in salaries, such as raises or when you need to hire additional employees in the future.
Add up the total spent on machinery and supplies. This is a relatively straight forward calculation that requires invoices and receipts, provided that you have already purchased the equipment. Remember to factor in delivery costs. If you have not yet purchased the equipment, such costs are easily estimated by noting the market price for such goods.
Calculate the total amount spent on rent for your project. The time period you use is up to you. Many businesses, especially office based ones, pay rent for the lifetime of the business. If this is the case, calculate your rental costs based on the businesses "start-up" time, which may be anything from a few months to a couple of years.
Other businesses, such as factories, take out a commercial mortgages, and these should also factor into your costs.
Calculate the taxes you owe on your business. The use of an accountant may prove invaluable for this, as they will be knowledgeable on not only methods but also federal and state taxation laws. Any grants you receive for your business should be factored into such calculations.
Add any additional expenses incurred, if applicable. Add all costs together and subtract the principal of your business start-up loan to obtain the explicit cost for your business start-up.