Budgeting for Your Business Boom: How Much Office Space Can You Afford?
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
When you're a new business owner, one of your biggest pain points may be money. Even if you've worked hard to save up a cash cushion, and your financial backers understand your needs, you still want to preserve cash flow during those first months as a business newbie.
Since leasing your new office space is a significant financial investment and one you may be locked into for several years, it's a budget item that deserves its own plan.
Here, we'll help you navigate the complex process of budgeting for office space so you'll be confident in negotiating a deal that includes affordable monthly payments and more.
First, we'll look at everything that may be included in your monthly rent bill and how you may be able to negotiate some of these costs.
Understanding the True Cost of Office Space
Before we look at strategies for keeping your rent costs manageable, it's important to know what's included, especially as many lease listings only advertise a rate per square foot (this is often called base rent).
In addition to base rent, your lease contract may indicate that you're also liable for:
- Property taxes, insurance, and common area maintenance (CAM) charges.
- Your utility costs may include electricity, water, gas, and internet.
- Parking for you, your staff, and customers, especially in urban areas.
Before you panic, keep in mind that you may not be required to pay for all of these items and that most of your lease items will be negotiable.
Next, you'll want to look into how much space you'll need within your office.
How Much Room Will You Need?
To accurately budget, you need to know how much space your business requires. This can be tricky until you add up the following.
- Calculate square footage per employee. Generally, you can factor in 150 to 175 square feet per person for traditional offices or 75 to 150 square feet if you plan to lease an open-plan office.
- Consider your hiring plans for the next three years. This can be difficult for new business owners.
- Think about the common areas you'll want to have in your office space, such as conference and break rooms. You may also want a reception area.
Now that you have your calculations in hand, you can begin to look at some strategies used for determining your office rental costs.
Budgeting Strategies
Even if you find one of these easier to work with than others, you'll end up with the best possible estimate if you run your numbers through all four of these rules/equations.
- Many businesses allocate between 1% and 3% of their gross income for office space. For example, if your annual revenue is $1,000,000, you might budget $10,000 to $30,000 yearly for rent.
- Another approach is to ensure your annual income is 20 to 30 times your monthly rent. If you're considering a space that rents for $5,000 per month, your annual income should be between $1,200,000 and $1,800,000.
- Zero-based budgeting can be especially helpful for new business owners. Start from zero and justify every expense you'll be managing, including office space. This method can help you determine the true value of each square foot to your business.
- Create and compare three budget scenarios—best case, worst case, and most likely—to ensure you can afford your space even if business slows down.
Since budgeting for a new business is venturing into mostly uncharted territory, you'll want to find other ways to control costs for the first year or two. Here are some things to consider.
Cost-Saving Tips and Strategies
Locking in as many discounts as possible into your lease is a must. You may be able to save by suggesting one or more of the following to a landlord:
- Agree to a longer lease term for a lower rate.
- Ask for rent abatement periods or graduated rent increases.
- Negotiate a tenant improvement allowance.
- Ask for permission to sublet if, in the future, you realize you have extra space.
Landlords with high vacancy rates may be much more willing to negotiate, especially if you consider a longer lease term.
If you can't successfully negotiate for office space in a traditional building, you have other options.
Coworking spaces and serviced offices are popular as they offer shorter lease terms and considerably lower costs, with the additional bonus of networking opportunities with other new business owners.
Go for a smaller office space and use smart design strategies. These can make it possible for your business to thrive in a space that may appear too small at first glance.
After you've gone through these steps, you may be ready to sign your first office lease. However, it never hurts to get a second opinion from a business associate or commercial real estate agent. It could help you steer clear of the following.
Don't Fall for These Pitfalls
After you complete your office space budget, put it away for a few hours before taking one last look.
Do you see anything like these mistakes?
- Ignoring Market Trends: Not considering how market changes might affect your space needs or rental rates.
- Skipping Insurance: A small business insurance policy can protect you from a variety of unseen expenses.
- Neglecting Exit Strategies: Failing to plan for what happens if you need to downsize or relocate.
If your needs change, not all is lost, especially if you have the opportunity to renegotiate your lease.
List & Browse Office Space for Free on MyEListing.com!
Budgeting for your first office space is a delicate balance between current needs, future growth, and the unpredictable elements involved in launching a new business.
MyEListing.com maintains one of the largest databases of office space listings in the country. The best part? It's completely free to use.
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