When a person or group is starting a new business, especially for the first time, it is extremely common to underestimate the necessary startup costs involved. Without doing exhaustive research or already having the experience of starting a new business, it’s hard to imagine all of the different costs needed to get your business up and running.
What Are Startup Costs?
Startup costs include anything you spend money on to launch a new business. After figuring out what you’ll be spending money on, experts generally agree an entrepreneur should have at least six months’ worth of fixed costs ready before launching a new business. Other estimates suggest three months’ worth of fixed costs are enough, while others recommend having a year’s worth of fixed costs on hand. Depending on the size of your business or the industry your business is in, the fixed costs you should have on hand for starting a business can be substantial. If you start a business with insufficient funds available before your business stabilizes and starts making a profit, there’s a good chance you will be caught off guard struggling to finance operations.
When estimating your startup costs, you must consider every detail including physical assets, services, vendors, payment terms, taxes, insurance, and much more. Be prepared to shop around and be flexible wherever possible. Plan on doing a lot of research, and don’t try to calculate your startup costs in a weekend. It would be smart to contact others in the same industry or similar businesses and buy them coffee or lunch in exchange for ‘picking their brain’ on helpful tips and what you should consider when calculating your startup costs. If you’ll be doing business in the same area as a competitor, you might consider talking to someone from a different area or even a different town or city. Few business owners want to share their experience, knowledge, or secrets with a competitor.
The Small Business Administration (SBA) suggests contacting SCORE, Small Business Development Center, Women’s Business Center or Veterans Business Outreach Center to speak with a counselor or advisor on starting a new business.
What Startup Costs Should I Include in My Calculations?
An optional startup cost that could prove to be an extremely valuable expense is hiring a market research firm to help assess anything you could want to know about expected expenses, how to run your company, where to find supplies and vendors, and typical methods common to your industry. If you haven’t considered this expense, you may want to reconsider because it could mean the difference between success and failure for your new business.
Location Where You Will Conduct Business
This should happen fairly early in your startup costs calculations. How important is the location for your business? Will you need to go to your clients, or will they have to come to you? Or is a face-to-face interaction even necessary?
Maybe your business only requires you to work from home. Since Covid 19 really started impacting US businesses in the spring of 2020, business owners are re-evaluating if their employees even need to be at an office or can they do the work from their homes. The latter is definitely a more economical option in most cases. However, if you are renting out an office space, consider if you are able to rent out a portion of that property to another business thereby adding extra income to your bottom line. You could also consider buying a property if it fits with your business plan and financial parameters.
Equipment and Furniture
The type of equipment and furniture you’ll need depends entirely on the industry of your business and its size. You want to get what you need, and you want to purchase quality equipment that will last. However, there are times when a new business can only afford to purchase used and refurbished equipment.
If your business requires people to come to your office, it’s a good idea to have new furniture. Older and obviously used furniture does not present a good, successful impression on your potential clients. If you have employees, you’ll need furniture for each employee in addition to a computer, telephone, printer, and break area. If your business only requires you to work from home, most of this is not likely necessary.
Mortgage/Rent, Utilities, and Maintenance
Get used to these two expenses; they’ll always be there. The only exception is if you pay off the mortgage down the road. When you start a business, you will likely be renting unless you are working from home. If you are renting, prepare to pay first and last month’s rent as a security deposit. If you’re buying a property for your business, you are probably already acutely aware that you’ll be required to make a down payment. While the down payment for a home is typically 20%, down payments for commercial properties are usually at least 30%.
If you have an office space, plan on paying monthly for your electricity, water, phone service, and Internet usage. The more space you have and the more fans and lighting fixtures there are, the more you’ll be paying each month. In the beginning, it might behoove you to ask your electric company to come out and assess the efficiency of your location (usually a free service). Fixing inefficient issues can significantly save you money in the long run.
If your business requires a physical property, that property will need to be maintained. This will include cleaning, taking care of the grounds (mowing and trimming), plumbing, electric, parking areas, and maintenance of all doors, windows, and HVAC systems.
Many businesses require inventory, and some don’t. Calculating needed inventory can be tricky if you don’t have some knowledge and experience dealing with inventory. You don’t want to have too much for storage reasons or potential spoilage. You also don’t want to have a shortage of inventory and cause your customers to take their business elsewhere. If you have storage and the means to keep your storage in good shape, consider having more inventory rather than a shortage of inventory. You want to make a good impression on new clients. See below for useful inventory templates.
How much does an employee really cost? The Small Business Administration (SBA) says a good rule of thumb estimate is 1.25 – 1.4 times their salary. In your considerations for costs per employee, the net pay is a given. But don’t forget to include insurance, overtime, commissions, and paid time off. In a year, all of these ‘extras’ can really add up.
Costs of Choosing a Business Entity Plus State and Federal Licenses and Permits
Your business will probably choose a business entity that typically includes one of the following: sole proprietorship, general partnership, limited partnership, limited liability company (LLC), C-corporation, or S-corporation. The entity you choose in addition to the state and federal licenses and permits required for your business will determine the price you pay for these documents and designations. They will also have an impact on the taxes your business must pay.
Marketing and Advertising
Your business may need to invest in marketing and advertising. If you have a brick-and-mortar store, you’ll need signage in addition to other typical marketing materials most businesses need. These can include business cards, print ads, online ads, logos and slogans, vehicle painting, banners, and other types of marketing methods and materials. Luckily, we live in an age when there are ways to save money by marketing your own business online through social media. This can save a business money. However, if you have little or no confidence in your ability to market online, there are capable professionals you can hire that will handle these tasks for you.
Other Startup Costs That Should Be Considered
Shipping is a cost you need to consider. If you sell a physical product, you’ll need to consider shipping supplies to your business, and you’ll need to consider the cost of shipping computers, furniture, and anything else needed to launch your business.
Don’t forget about travel. Before launching a business, you may need to search the location of your business, visit vendors, visit the facilities of your suppliers, and set up business relationships with consultants, accountants, potential customers, and a number of other business-related entities.
To calculate the costs of starting a business, try to overthink this process and consider even the smallest detail so you aren’t surprised when these expenses start surfacing after you launch your business. If you can, stay frugal until you are sure you can afford otherwise. When possible, take on some of the roles yourself if you have the capabilities and time to do so. Some of these activities might include payroll, marketing, and even cleaning and maintenance. Research everything you can, so you can make the most informed decisions possible when calculating startup costs.
Every new business should draft a business plan and include startup costs. Below are a couple of resources to help make your startup cost calculations easier.
Small Business Administration (SBA) sample startup cost calculator spreadsheet
SCORE’s Startup cost calculator spreadsheet (plug in your own numbers)
TemplateLAB’s 50 best startup budget templates
Jotform’s Templates for calculating inventory