How to accurately estimate startup costs
What Business Startup Costs Should You Consider?
- Startup costs are expenses incurred during the process of starting a new business.
- Every fledgling business has startup costs unique to the business, but there are general costs all businesses should be aware of.
- Many new businesses fail because they don’t properly budget for startup costs.
- This article is for people who are preparing to launch a new business and need to know what costs are involved.
Opening a business takes more than coming up with a name and a building – it requires careful planning and budgeting. Lack of funding is a main reason why businesses fail, which can result from miscalculating how much money is needed to keep the business running daily, or by not budgeting enough for the various costs associated with getting the company off the ground.
This guide will help you understand what startup costs are, how to calculate them and which ones you should budget for.
What are startup costs?
Startup costs are expenses incurred during the process of starting a new business, and they should be outlined in detail in your business plan. A business plan is absolutely essential to launching a business, and writing one should be one of your very first steps.
In your business plan, you’ll outline what you believe your initial startup costs will be. Be generous and overbudget for them; unexpected costs are sure to pop up, and you don’t want to run out of funds before you get your business off the ground.
Likewise, underestimating expenses falsely increases net profit projections, which could end in disaster for you and your business. [Read related article: The Do’s and Don’ts of Writing a Great Business Plan]
Key takeaway: Startup costs include all expenses incurred while creating a new business. When writing your business plan, overbudget for startup costs to ensure you have enough money to get started, even if unexpected costs arise.
Startup costs you should know about
Because every business is different, startup costs vary depending on your business’s needs and specifications. For example, a brick-and-mortar store will likely have a higher startup cost than an online business, and a coffee shop requires different equipment and furniture than a bookstore.
However, several universal startup costs apply to most types of businesses.
1. Research costs
Though this is optional, some business owners hire market research firms to help them assess the industry and market before starting their business. You can save money by doing this step on your own, but if you hire a research firm, include this cost in your business plan. [Read related article: How to Conduct a Market Analysis for Your Business]
2. Borrowing costs
Creating any new business requires a lot of capital, which is usually acquired in one of two ways: equity financing or debt financing. Debt financing means borrowing money directly, whereas equity financing means selling a stake in your company to receive financial backing. Most businesses take out small business loans – including SBA loans – from banks or other lenders.
If you take out a loan, calculate the costs of the loan payments into your budget, and ensure payments are made on time.
3. Insurance, licensing, and permit fees
As you write your business plan, research the licenses, permits, or insurance required of your business. You should carry some form of insurance to cover yourself, your employees, and your business assets from any liabilities that may arise, and be sure you consider the continuing cost of renewing licenses or permits as needed. [Read related article: An Insurance Primer for Small Businesses]
4. Technology costs
This is an umbrella category that covers anything from the cost of creating and maintaining a website, setting up information systems, computers, and the use of accounting software and a payroll service.
Some small businesses may outsource their payroll and accounting needs to save money, though there are many budget-friendly options available. There are also plenty of ways to save on other technology costs, such as building your website.
“The cost of building out a website with customized graphics ran me about $1,200,” said Jonathan Mandell, CEO of Teepee. “I primarily used contractors on Upwork and Fiverr.”
5. Equipment and supplies
As with startup costs, the exact equipment and supplies you’ll need will depend on your specific business. In your business plan, you should outline a general list of all the equipment and supplies you think you’ll need and whether you plan to lease or buy each piece of equipment. [Related: Equipment Leasing: A Guide for Business Owners]
6. Legal fees
It’s recommended that you involve a professional to ensure all of your necessary documents are in order. A lawyer can help you get your business incorporated, register for licenses or permits, oversee contracts, minimize your risk and liability, and more.
“I worked with a law firm that charged me about $500 for incorporating my business and making sure I had the proper documents in order,” said Mandell.
You should start getting the word out about your business so you have customers once you open. Marketing costs include all of your advertising and promotion costs, plus whatever you spend creating a marketing strategy. You may choose to create a strategy on your own or hire a marketing company to help you. If you do your own marketing, carefully track your spending.
“It’s easy to throw money at Facebook or Google ads and get excited when they bring in customers,” said Alex Willen, founder of Cooper’s Treats. “But you absolutely have to understand how much you’re spending on those ads in order to acquire a customer and how much profit those customers are bringing in.”
Key takeaway: Every business will have unique startup costs, but, generally, you should look at costs for legal assistance, marketing, technology and licensing.
How to calculate your startup costs
As a business owner, one of the keys to early business success is preparation and careful budgeting of your organizational expenses. Understanding your expenses and how you will manage them helps you launch your business successfully and continue to make a profit once your doors are open. By calculating your startup costs, you can:
- Estimate future profits
- Perform a break-even analysis
- Secure loans
- Attract potential investors
- Save money through tax deductions
There are three easy steps to calculating your business startup costs:
- Identify your expenses. These may include the expenses outlined above plus additional costs that are unique to your business.
- Assign a cost estimate to each expense. Go through your entire list of expenses, and assign a cost to each one. Include the exact cost, if you know it, and give your best estimate if you don’t. It’s important to be thorough in this step – try not to leave any expenses out or guess at costs. If you do need to guess, be generous, and give yourself some wiggle room.
- Add up your expenses. Once you’ve identified all of your potential startup costs, you can organize them into categories based on one-time expenses and recurring expenses. For example, the cost of office equipment or hiring someone to build your website are one-time expenses, while a monthly expense, like rent for your building, is a recurring cost. The one-time expenses constitute your startup costs, and adding the one-time costs to your recurring costs gives you a good idea of how much capital you need to start your business.
If you plan to use your calculations to secure a small business loan or funding, it’s recommended that you create a formal report of your expected costs that is clear and easy to read. You can also typically deduct one-time expenses for tax purposes, which can save you money. [Read related article: How to Create a Business Budget, With Free Budget Template]
Key takeaway: There are three steps to calculating startup expense: List your organizational costs, assign an exact cost or cost estimate to each item, then add them up and separate one-time costs from recurring expenses.