Starting a small business in today’s globalized, online economy is easier than ever before in many ways. The internet provides a huge wealth of information on the processes involved, your potential competitors, and even how much of a real-time demand there is for the product or service you want to provide.
However, there is one aspect of starting your own small business that every entrepreneur needs to be aware of: calculating your startup costs. Before your first product goes on the market – before your first client walks through your door or sends you an email inquiring about your services – you need to know how much money will be going towards expenses before the first dollar even lands in the cash register.
There are seemingly endless combinations of variables when it comes to small business startup costs, but don’t let that frighten you – there are sets of basic costs that every small business has to deal with, and it all depends on what kind of business you plan on starting. This leads us to our first step in the process.
1. Decide what kind of business you want to start
Generally, your business is going to be one of three types of business: a stationary retail business (also called a “brick-and-mortar” business), a service provider, or an online business. Naturally, these three kinds of businesses have different basic startup costs.
In addition to the different kinds of businesses, startup costs can also be broken down into different kinds of expenses that can apply to all businesses: one-time expenses, variable ongoing expenses, and fixed ongoing expenses. One example of a potential one-time expense is the trademark for your product – on average, it will cost about $970 to trademark a name. This leads us to our second step in the process.
2. Calculate your initial startup costs
Let’s take a closer look at what kind of initial costs an entrepreneur may have to consider.
One-time expenses are exactly what they sound like: larger expenses which you’ll need to get your startup business up and running. These startup assets are things like:
- Basic required equipment, including computers, IT infrastructure, office supplies, and industry-specific equipment required to perform the services you want to offer or manufacture the product you want to sell
- One-time costs associated with opening a physical office location or retail storefront, such as a down payment or security deposit
- Licensing and permit costs, such as the trademark fee mentioned above
- Startup inventory – you can’t make something with nothing!
- Company vehicles
- Store/office furniture and point-of-sale supplies
These and other costs are what’s needed before the first dollar even comes in. After that, there are ongoing business costs that require regular attention.
3. Calculate ongoing business costs
As mentioned before, ongoing expenses are broken down into two categories: fixed and variable. Fixed costs are expenses which are predictable and regular, such as:
- The lease for your office space or storefront
- Utilities for your office or store
- Various kinds of insurance
- Payments on credit or business loans
- Website hosting fees
Variable ongoing costs can change from month to month and even week to week, depending on your type of business. These can include:
- Payroll expenses (paying your employees and contractors; employee benefits)
- Federal, state & local taxes
- Packaging, shipping & handling fees for your product
- Legal and accounting fees for your company’s lawyer and accountant
- Business trips and travel
- Advertising & marketing – physical materials, online advertising costs, etc.
- Any service outsourced to other companies – marketing, graphic design, IT/security services
Of course, these lists are by no means comprehensive. These are only a few of the most common startup costs which most entrepreneurs face when starting their own small business. If you’re one of those entrepreneurs and you have a well-developed business idea, you should be able to immediately identify which items in these lists apply to you, and which do not. For example, if you’re going to start an online business, you most likely won’t need to worry about any costs associated with opening a physical retail location like a store, such as leasing office space or utilities – at least, not at first. However, someone who does want to start a physical retail store will most likely want to have a great website, too.
So now that you’ve got an idea of how startup costs are broken down, how do you go about calculating them?
Precise calculations are very difficult to make, so you should focus on making educated estimates instead. The internet is a great resource for this. Fixed ongoing costs and one-time expenses should be fairly simple to estimate with a good deal of accuracy. Estimating variable ongoing expenses might take a bit more research, but thankfully, there’s a way to be well-prepared for even the most radically variable costs: a cushion.
4. Calculate a cushion for the time directly after your business starts operating
No, we’re not talking about the thing you’re sitting on while reading this. In financial terms, making a cushion simply means taking your costs calculations and inflating them a bit – just to be safe! In addition, it’s a good idea to assume that your business might not be able to cover the expenses at the very beginning of operation with sales and revenue. Even the greatest business ideas need time to really take off! Creating a cushion includes this assumption of little to no revenue for the very beginning of your startup’s life. Give your small business time (and enough capital resources) to grow.
And now onto the final step!
5. Add it all up
Once you’ve estimated your various costs and applied a cushion, the only thing left to do is add them all up. The final sum will probably be a small shock, but remember, this is normal – starting a new small business costs money, after all. Thankfully, there are plenty of financing and funding options for new entrepreneurs that will help you get started. It’s a good idea to make a formal financial report based on your calculations to show potential funders. And remember to keep your initial financial plan flexible – circumstances can always change, and you’ve got to be prepared to grow with your new business!
The key to success in a small business is preparation, innovation, and flexibility, and with these steps, you’ll be well on your way to a good start.