When starting out with a business, there are important questions you need to ask yourself. And, of course, you should have answers to them before you start. One of those questions will be, “what are the things you need to start a business?” The answer: first you need guts, and the second, you need money. So how much does it cost to start a business?
Although the answer to this question may vary from business to business and between individuals, you still need to know the estimated amount that will give you a good start in your business. So, in this article, we will be showing you how to identify startup expenses and calculate the amount you will likely be needing to start a business.
Related Article: How Much Does It Cost to Start a Business?
First, What Are Startup Expenses?
These are expenses you incur before the launch of your new business. You need to identify these costs and have their correct estimate in your business plan. Startup costs could include location expenses, legal paperwork, equipment and inventory, basic marketing costs, etc.
In order words, we can say that startup expenses are the costs of starting a business before you begin making any money at all from the business. Before starting a business in any industry, you should first know the startup costs and have enough capital to foot those costs. It will take time for your business to be established; you don’t want to see yourself struggling so much during the incubation time.
How to calculate startup costs: a breakdown of the expenses
To calculate startup costs for any business, you will need to first understand that these expenses are divided into two categories: initial startup costs and ongoing expenses. When you properly have these two categories covered for your new business, you are less likely going to run out of capital a few months down the line. So let’s see what’s included in each of these startup cost categories.
Estimating Initial Startup Costs
These types of expenses are usually a one-time thing. For instance, you only do market research once before starting your business. Attorney fees, equipment, incorporation fees, etc., are all one-time payments. So, let’s get to see some more startup costs that will likely find their way into your budget before starting out with your business.
- Incorporating fees: This is the fee you pay to the state when your form your business – whether you are going with an LLC or a corporation. Although you can avoid these costs if you start the business as a sole proprietorship or partnership, the downside is that you will be losing out on some important benefits.
- Market research costs: These are costs you make to understand the feasibility of the business in a particular area before you start the business. The research will help you understand who your competitors are, what they are doing, and what products you could offer to have the edge over them. This will not only cost you some money but will also require plenty of time.
- Getting permits and licenses: This is another area you will also need to estimate some expenses before you start any business. Your business will need to be registered, and that doesn’t come for free.
- Buying inventories: If you are running an e-commerce business, especially dropshipping, you will need to keep inventory on hand. So, budget some fraction of your startup capital to buying and making your initial inventory and then storing them.
- Purchasing or leasing equipment: Depending on the type of business it is and how big you want to start out, the cost of purchasing equipment is usually a capital part of startup costs. So know how much your equipment is going to cost and factor that into your budget.
- Renting a workspace: Even if you will be working from home, you will still need a physical place you can call your office, workshop, retail location, or a place to meet with clients. This will also come at a cost. Plus, you will also be needing some office furniture, machinery, a computer, and software, etc.
- Designing a website: This also is a one-time thing. Whether you will be building your website by yourself or contracting it to a designer, you will be incurring some costs. So pen that down as one of your initial startup costs.
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Estimating Ongoing Expenses
In business, not everything you need to keep the business running successfully will be a one-time thing. There will also be some ongoing expenses that will show up, whether weekly or annually. So, to see your business do well without putting a string in your pocket, it is best to identify some ongoing expenses and plan for them in your budget – at least six months in advance.
Some ongoing expenses for a startup include:
- Costs for marketing: Marketing is an ongoing thing. So budget for things like placing advertisements online, print ads, radio ads, and maintenance of your website.
- Payroll: Even if you are starting out very small, you will likely need one or two people to join you in running the business. And these people will have to be paid regularly. So whether you are hiring freelancers or in-house workers, make sure you can estimate their wage and include that in your budget.
- Shipping: If your business involves shipping, then it will likely be an ongoing thing.
- Vendor payments: If you are making your products yourself, you will need to buy materials to make them. If you will be buying goods to resell, you will also need to pay vendors for the goods.
- Office supplies: Although this may look negligible, don’t overlook it altogether.
- Insurance: Yes, having proper insurance coverage for your business will require you to pay certain amounts every month to protect yourself from liability.
- Taxes
- Rents, etc
Some Other Tips for Calculating the Cost of Starting a Business
Starting a business can be draining and overwhelming. But it doesn’t always have to be so. By following some useful tips, you can save yourself some extra stress and grow your business in the best way possible. Let’s take a look at some more tips to he you calculate how much money you need for your business.
#1: Check other similar businesses
Research the financial statements of some similar businesses in your industry. Even if this won’t allow you to see all the average startup costs they do, it will give you an idea of what they are spending their money on. Then you can properly prepare your budget in that light too.
#2: Overestimate startup costs
This is one good tip you need to keep close to you when starting a business. Experts will always recommend that you add 10% to your business cost to make do for unforeseen or miscellaneous expenses.
#3: Estimate ongoing vs. one-time cost
It is good we remind you about this again. Be sure you know your one-time expenses and ongoing expenses. Are the expenses one-time payments, or will you need to make the payments every month, six months, or annually?
#4: Fixed or variable costs?
Establish which category every expense falls into. Fixed expenses include things like administrative fees, rent, insurance costs, and utilities. On the other hand, variable expenses are shipping and packaging costs, inventory, sales commissions, etc.
#5: Determine if they are essential or optional expenses
While identifying your startup costs, also decide whether they are essential or optional. You should have all of these things in your budget when starting a business.
Putting It All Together
Now that you know the expenses you will likely encounter when starting a new business, it shouldn’t be difficult again to decide how much it costs to start a business. Just make a list of what you will be needed in the business and categorize them as stated in the article.
Follow the additional tips, and don’t forget to leave room for miscellaneous expenses.
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