So, you’re thinking about starting a business? Before becoming an entrepreneur, you must understand the law of supply and demand, come up with a killer product or service, and be willing to take on the risk. And, most importantly, you need to know how much starting your venture is going to cost you.
When it comes to unplanned expenses, you want to avoid as many surprises as possible. Planning for business startup costs can help you predict how much money you will need and prepare accordingly.
I would like to say that I budgeted every penny when I started my first business, but nothing could be further from the truth. Forecasting my startup costs would have helped me make sure I had enough money to cover necessary expenses and survive. But that planning and forecasting never happened. Instead, my closest friend and I decided to quit our high-paying corporate jobs and “wing it.” Winging it was NOT a good idea, and it made for a terribly difficult startup.
How to plan for business startup costs
Ideally, you really should calculate how much is your startup idea going to cost you. Planning for business costs is a process—it takes time, research, and energy to come up with a close estimate.
The closer your estimate is to your actual startup costs, the better prepared you’ll be. Your actual business expenses may vary, but you can use these four steps as a general guideline to get you started.
Decide on business details
The first step of planning your startup costs is narrowing down details about your business.
Are you starting a brick-and-mortar or online business? Will you be based out of your home or rent office space? Do you offer products or services? Are you starting your business from scratch or opening a franchise?
Some of the startup expenses you incur depend on the type of business you start (e.g., home-based or storefront), where you start it, and the industry. To further plan for expenses, conduct market research.
According to the Small Business Administration (SBA), starting small businesses, such as online or home-based companies, can cost as little as $3,000 or less. On the other hand, the average startup cost was once reported to be $30,000.
If you plan on franchising, contact the companies you are considering. Your startup costs vary depending on the franchise, location, and whether there is an existing building.
If you’re thinking about starting a non-franchise business, consider hidden costs like brand building. And if you’re opening an online business, factor in expenses such as setting up a website or cloud-based hosting costs.
Understand common startup costs
To plan for costs, you need to know what kind of expenses you might have. Although every business is different, many startups deal with similar costs.
Some common startup costs include:
- Equipment and supplies
- Professional fees
- Business registration fees
- Employee wages and payroll tax contributions
When you start a business that sells products, you need to purchase inventory to make and sell goods. Go beyond the cost of inventory by considering the cost of shrinkage, which is when you lose inventory to damage or theft.
Unless you are starting a home-based business, you will either need to purchase or rent a storefront for your business.
Most startups purchase insurance. Some types of insurance might be required, like workers’ compensation insurance, while others are strongly encouraged, such as general liability insurance.
Marketing is an essential part of getting your brand out there and diving into the market. Without marketing, how would consumers learn about your startup? Allot some funds to marketing your small business.
From paper to computers, you need supplies and equipment to get your startup off the ground. Many types of equipment and supply expenses are optional, so be sure to determine your necessary costs first.
To simplify your responsibilities and increase accuracy, you might opt for software solutions, such as eCommerce, customer relationship management, accounting, and online payroll software.
You owe taxes on the income your business earns. And if you file taxes incorrectly or late, you may owe penalties, too.
To help you start, you might need the help of professionals, like a small business lawyer or accountant. Be sure to budget for their fees when planning for startup costs.
If you want to legally register your business, you need to choose a business structure. Depending on the entity you choose, you may need to file documents, like articles of incorporation, and pay a fee.
Do you plan on hiring employees when starting your business? Employee wages can quickly become one of your most expensive costs. You not only need to budget for the wages themselves, but also for payroll taxes and benefit contributions.
Some of your expenses are one-time purchases (e.g., property) while others are recurring (e.g., utilities). The budget for both costs accordingly.
Again, you may have more or fewer costs than the ones listed above. Consider your startup’s needs when listing out expense categories.
Create your startup cost estimate
Now that you are familiar with common startup costs, you can start calculating your estimate. Your estimate shows you how much money you need to cover your startup costs. And, your estimate predicts how much money you need to make during your first year to turn a profit.
You can create your estimate by listing out the types of expenses you expect to incur. It’s also wise to plan for unexpected expenses, too. List your expenses from most to least critical.
After you’ve listed out the types of expenses, you need to assign costs to each category. Conduct research to come up with an accurate estimate.
Once you assign a cost to each expense category, you’re good to go. Add up the expenses to reach your startup cost estimate.
Keep in mind that many startup costs are tax deductible. You can claim tax deductible expenses to lower your tax liability during your first year.
Once you’ve estimated how much your startup expenses are, you need to plan accordingly. If you plan on bootstrapping your business, set aside enough, and a safety net, to start your business. But if you don’t have enough capital to bootstrap your small business, you need to secure financing.
When you need extra funding to cover your startup costs, you have a few options. But be forewarned that this is not an easy process. You can apply for a bank loan, an SBA loan, a business line of credit, or business credit card. Or, you might go the investment route and secure financing from investors, friends, and family, or crowdfund.
Over 60% of small businesses use loans for financing. However, securing a bank loan might be difficult when you’re just starting out. To increase your chances of obtaining a loan, you can apply for an SBA loan. With an SBA loan, the Small Business Administration backs the loan, which makes it less risky for the bank to loan you money.
Securing loans to cover startup costs can land you with additional expenses. Factor in business loan fees, like interest and administrative fees, when applying for bank loans or credit. Add these expenses to your startup’s estimated cost.
If you secure investments, you may need to give the investor a role in your startup. And depending on whether you pitch to a venture capitalist vs. angel investor, your investor may expect a hefty return. Securing extra financing will be one of the most difficult aspects of launching your startup, which is why it’s a good idea to do your planning in advance.