Starting a business is an exciting yet challenging process, as it costs lots of money. While determining business start-up costs, it is essential to be pragmatic. Office equipment and office space, payroll, legal fees, business credit cards, and miscellaneous organizational expenditures can add up.
The issue of costs is crucial as the initial investment can be significant. A Kauffman Foundations research illustrates the average cost to be around USD 30,000 and costs tend to go higher each year.
Some types of businesses, like home-based companies or micro-businesses, have lesser financial entry barriers. If you aren’t thorough with your financing planning at the beginning, you may risk your business’s future. This article enumerates a list of different types of small business start-up costs the business owners must consider when launching your company.
Calculating the Cost of Starting a Small Business
Creating a business plan is the most efficient way to predict your business start-up costs. In your plan, the financial projections part should estimate the profit, revenue, and expenses for the next three to five years,
Some other resources to approximate your finances, like SBA start-up costs worksheets, are available online. These templates help in estimating the initial investment costs, so you know how much capital you need to request when seeking small business start-up funding.
It is to be noted that various business costs listed here are recurring. You’ll be required to cover the costs over a monthly, quarterly, or annual basis–rent, payroll, and office supplies. Other expenditures, such as the incorporation fee or office equipment, are one-time costs.
Don’t rely on the business’s revenue to start easing the costs until the initial period is concluded. You’ll need a cushion once you get the business off the grounds and work on growing business.
- Research Expenses
Before starting your small business, you can conduct market research about the prospective industry. Some business start-ups avoid this step, which results in the inability to execute their ideas.
To avoid this issue, consider employing a market research team to support you in the assessment process. Certainly, you will be required to pay these professionals, so it is best to include the research expenses in the small business start-up budget.
Almost all businesses need to finance equipment right after they open up. Equipment expenditures for small business startups can vary from USD 10,000 to USD 125,000, based on the type and size of the industry or company.
For instance, if you own a restaurant, you will require commercial-grade ovens, dishware, stoves, and utensils. If you own a salon, you’ll be needing styling chairs and hair styling equipment.
Hiring staff will add to the costs, as you will need to secure each piece of equipment, too.
- Incorporation Fees
Once you start a business, you’ll require to select a business entity, which determines the business’s taxes structures. For example, if you incorporate your company, it will be an individual legal entity, and you will be required to file articles of incorporation with your state.
Review the Small Business Associations (SBA) state by state breakdown to assess how much it will cost you to incorporate a business in the state.
Similarly, some businesses, such as aviation or agriculture industries, need federal licensing, whereas service-based businesses like hairdressing or dentists require professional licenses.
Irrespective of whether you rent or buy a business space, it will be fairly costly. Therefore, several small business owners function from their homes to save money.
If you get trapped into a long-term lease, you can pay a significant sum of money. Additionally, you’ll need to consider other factors like operational costs and utilities. Even if you can afford it, you’ll be required to manage the tasks like designing a layout, negotiating a lease, purchasing furniture, and setting up the equipment.
You also need to start paying for rent before you start operating the business. Therefore, if you put aside a security depository and pay rent before opening up, it is regarded as a startup expense.
On this note, you may consider co-working spaces. They are an affordable option and are ready to use from day one. Several spaces include the furnished, utilities, and amenities options within their package.
You may join one space or co-working membership applications like Croissant, which encourage members to work from different locations in a cost-effective manner.
- Inventory Costs
Not all businesses sell inventory, however, if you own a restaurant, retail, wholesale, or manufacturing business, you are expected to have some sort of inventory. However, ordering inventory can build financial challenges. If you have excess inventory, you risk spoilage or being trapped with the products that are not selling. On the other hand, if you have too little inventory, you may lose customers who are not willing to wait much for an item to be restocked.
Inventory financing comes with minimum requirements which are not convenient for new small business startups. It is recommended to make inventory a part of the initial startup budget, then apply for financing after the business is operational.
You will be required to spread the word, once your business is opened. You might need to invest in business cards, banners, print ads, and online PPC advertising. Without investing in marketing you can not accrue sales. However, to keep the costs affordable, it is suggested to utilize social media like Instagram and Facebook to advertise your new business for free until the business starts generating sales.
Most customers research the services and products on the internet, therefore, online presence is a must in modern marketing. About 41% of businesses have an online presence using the services like WordPress and Squarespace.
If you are tech-savvy, you can get started, by registering your domain that entails annual fees. Then, select a CMS to build your build. Often CMS is free, but sometimes they can have a subscription cost. However, if you are not familiar with web design, you may need to hire a web design company to create the website, which ensures more costs.
- Office Supplies
This may include water coolers, desks, chairs, hardware and software, phones, coffee maker, microwave oven, and filing cabinets. Don’t avoid office supplies, as they can include a considerable section of your budget. If you are not able to afford office costs, you can work remotely.
The type of cost applies to traditional commercial office and space leasing arrangements. You will pay for the utilities like gas, electricity, water, internet, and phone. When assessing the budget for utilities, you need to factor in these as an ongoing business expense.
If you have hired staff and workers, you will need to pay them even if the business is not generating any profits yet. Additionally, you need to allot a specific sum to pay yourself. Payroll costs also include stipends, benefits, overtime pays, and commissions.
- Professional Consultants
Although it is tempting to try and take on as many responsibilities as possible to save money. However, it is practical to hire professionals like attorneys, bookkeepers, and CPAs. For instance, accountants are better acquainted with legal structures like LLCs, S-corps, C-Corps, and sole proprietorships. The accountants can help to make sure that you are complying with the regulations of state and federal rules. Once the tax season comes, they can save you money in deductions on the tax returns. Similarly, outsourcing some of the major portions of your business to professional experts can be financially beneficial to your business, even if it adds to the startup costs.
- Insurance Costs
The small business needs protection to cover the home, health, and car. There is various business insurance, like protection from clients that file a lawsuit against you and disaster insurance for potential fires. The type of insurance your small business startup needs depends on the industry, the number of workers, and other risk factors.
Some of the essential forms of insurance you need to take into account are listed below:
- General Liability Insurance
The industry’s risk is the most important factor affecting the cost of this policy. Generally, you may put aside USD 400 to USD 800 per year for this insurance.
- Commercial Property Insurance
Based on the value of assets and property, and risk dependent on the nature of business and location of the property.
- Errors and Omissions Insurance.
- Workers Compensation Insurance.
Before starting your small business, you need to carefully consider the product or service, how much you will charge for the said service or product, and understand the potential challenges along the journey. Financing is one of the most challenging parts of establishing a business and you must be realistic while estimating the business startup costs. Startup costs are simple, but you need to be thorough and precise in this task. Later, after you have established your company, you must consider the budget you need to start the small business, how to structure your organization, and build a business plan to stay organized.