How to Add Leasehold Improvements and FF&E to the Startup Financial Model
Q: I’m working on my business plan and need to know how to enter startup costs such as lease improvements and FF&E that are spent before the opening of the business.
A: Here are some recommendations on how to think about leasehold improvements and FF&E and how to enter them into our app:
Recommended Strategy – For rank startups, we would never recommend signing a real estate lease, which typically has a 60-month term. Very few startups survive for 60 months and the successful ones will need more space along the way, so this is a risky liability to take on at the very early stages. There is plenty of gray space where you can crash at another business and get a couple of empty offices in the corner, you can use WeWork or Regus or other executives suites or co-working spaces, etc. You should do anything to avoid adding a huge liability to your startup.
Typical Reality – If you definitely need dedicated office space, in most cases any leasehold improvements are bundled into the overall lease and your monthly lease payments. In the rare cases where you are paying cash upfront for leasehold improvements, you would capitalize that and not expense it.
How to Enter in the Startup Financial Model App: If you are simply entering your lease expense as a monthly expense, you would add it under Occupancy Expenses, along with your estimated office cleaning, maintenance, utilities, and other occupancy-related expenses. So if your lease if $5,000 per month, your estimated utilities are $500/month and your estimated cleaning and maintenance is $250/month, you would enter $5,750/month. We would recommend that you look at your total FTEs on your Staff report and periodically bump up your overall Occupancy Expense over the life of your plan to make sure you have enough space to accommodate all employees our app is calculating for you.
Here’s an example of entering your Occupancy Expenses under Other Overhead Expenses:
If you are paying for leasehold improvements up-front, they should be capitalized over the life of the lease. Here’s an example of how to enter a $25,000 Leasehold Improvement as a Tangible Asset that will be properly depreciated under the main menu item of Asset Investment:
The Impact to Your Financials: Whether you expense or capitalize your Leasehold Improvements, it will still affect your cash, but it will affect your Income Statement differently. If you choose to capitalize by entering as an Asset Investment, then the only monthly expense is the Depreciation Expense, which is automatically calculated for you on the CapEx and Depreciation report. You can see the details on that if you drill into the report to see the depreciation details:
The Depreciation Expense will automatically be applied to your Income Statement under your G&A Expenses:
You can also see the cash impact on your Cash Flow statement on the Capital Expenditure line under Investing Activities:
…and on your Balance Sheet under Fixed Assets with the total and accumulated depreciation:
All of this is calculated for you automatically with only a few entries on the Asset Investment input. Also, note that you can drill into each of the above reports to see the monthly details.
FF&E (Furniture, Fixtures, and Equipment)
FF&E is very similar to Leasehold Improvements, in that if you are just getting started, we don’t recommend rushing out and buying a lot of expensive furniture. If your FF&E is a small amount that will be expensed, then we recommend that you add it to your Occupancy Expense during the months you expect to acquire the FF&E. Larger amounts of FF&E with a useful life should be entered under Tangible Assets as we described above for Leasehold Improvements and will again be automatically calculated and added to your financial statements as with the Leasehold Improvements example above.