Deciding to start a business is exciting, but can also be daunting if you're a new entrepreneur. Calculating business startup costs, worrying about long-term profitability and securing startup funding can all be pretty stressful. Unfortunately, it’s common for new business owners to jump into planning without considering if they can afford the necessary small business startup costs. This often leads to the business being unable to sustain itself. Meticulous financial planning in the beginning could help eliminate some of the risks your business will face.
Writing a business plan is the best way to estimate your potential startup costs. Within your plan, the financial projections section should estimate your revenue, profit and expenses for the next three to five years. There are other resources to estimate your finances as well, such as the SBA’s startup costs worksheet. Worksheets such as this will help you estimate your initial investment costs, so you know how much capital you should request if you decide to seek startup funding.
When calculating your business startup costs, a good rule of thumb is to be able to cover six months of expenses upfront. So don’t count on your business’s revenue to start easing your costs until at least after that early period. You’ll want a cushion while you get your feet under you and work on attracting customers to your business.
One thing to keep in mind is that many of the business startup costs listed below are recurring. You will most likely have to cover these costs on a monthly, quarterly or annual basis— think rent, office supplies, insurance, taxes and payroll. Other expenses, like an incorporation fee or office furniture, are just one-time costs.
Here is a list of common business startup costs to plan for:
Equipment– Most new businesses will have an immediate need for equipment. For example, if you start a moving company, you’ll need to purchase a truck. Depending on your industry, the equipment can be costly, especially if multiple employees need their own equipment. Luckily, there are numerous types of equipment financing options available, ranging from loans to leases to lines of credit. If you’re concerned that you won’t be able to afford the necessary equipment, you might benefit from applying for equipment financing to get started.
Fees– When starting a business, you will need to choose a business entity. This will determine how your business has its taxes structured. For instance, if you incorporate your company, it’ll be a separate legal entity and you’ll need to file articles of incorporation with your state. Review the Small Business Association’s (SBA) state-by-state breakdown to determine how much it will cost to incorporate a business in your state.
Office space– Whether you decide to rent or purchase a business location, it can be pretty expensive. If you get locked into a long-term lease, you could be paying a considerable amount of money. Plus, you’ll have to factor in utilities and other operational costs. Some other popular options are co-working spaces or operating your business from your home.
Inventory– Although all businesses don’t sell inventory, you likely need some form of inventory if you’re in the retail, restaurant, wholesale or manufacturing sectors.
Advertising– You will want to spread the word about your products or services. Without investing in marketing, you won’t be able to accrue sales. Still, to keep costs low, we suggest utilizing social media sites and other free and low-cost tools to help reach your audience.
Website– We live in a technology-driven world, and your startup’s online presence is often the first interaction someone will have with your brand. Only 19% of very small businesses without plans to build a website expect their business to grow by 25% or more in the next three years. Websites are vital to a successful small business.
Office supplies– Surprisingly, office supplies can add up rather quickly. These expenses can include everything from desks and office chairs to coffee makers and refrigerators.
Utilities– This cost applies to traditional commercial offices and brick-and-mortar lease arrangements.
Insurance– Just like you protect your health, car and house, your business needs protection too. There are several different kinds of business insurance, and depending on your business’s industry, this could save you money and stress in the future.
Before starting a business, you should carefully consider your idea or product, how much you’ll charge and understand the challenges you could face. Financing is one of the most stressful parts of entrepreneurship, but being realistic about how much money you need, by accurately estimating your business startup costs, will set you up for success.