Entrepreneurs, are you researching startup costs for your next venture? As a successful business owner, let me help you and share some important tips so you can avoid the mistakes I made in my first business!
Let’s get busy calculating your startup costs together.
Two Phases of Startup Costs – Setup and Operational
First, you need to know that there are two distinct types of costs, those you will incur as you set up your company and those that will continue to be expensed as you operate.
Set Up Costs
One time investment to open your store or launch your website includes such items as legal business formation, building renovations, and manufacturing equipment.
These are easier to calculate. You will research each item and simply add up the list for your total set up costs.
Ongoing expenses to continue business operations including rent, supplies, employee salaries – and most importantly working capital. Keep reading to the next section for how to quickly and easily calculate your business working capital needs.
These costs are more difficult to calculate because they have many more variables. As your sales increase so will your labor and material needs.
Startup Costs Calculator Worksheet
Use this interactive worksheet from the SBA government website to quickly determine your rough costs. Enter your expenses and it will automatically figure out your total funds required to start your business.
I like using this free template because it prompts you with a list of common startup cost expenses, so you don’t forget some expense categories.
Below I detail each category and give you my tips on how to best figure out your capital startup needs.
All businesses are headquartered in a particular location- physical or virtual. This location could be a brick and mortar store, manufacturing warehouse, business office or a virtual location such as an e-commerce website or your telephone. Begin by calculating the costs of these locations.
Costs to include are rent, security deposits, building permit fees, construction, website development and retail store display shelving.
Most locations have some form of the monthly fee that needs to be budgeted also:
Brick and mortar locations have monthly rent payments including other utility payments such as grounds maintenance, common area fees, and utilities such as electric, internet, telephone plus heating, and cooling costs. Also figure in the necessary furniture to make your company operational which could include desks, shelves, conference tables and chairs.
Technology costs such as computers, telephones and internet servers also need to be considered. Be sure also to set aside monies for the inevitable computer repair and replacement.
Other business services needed on an ongoing basis could include bookkeeping, legal plans (I like Legalzoom’s surprising affordable business legal plans ), IT technical support, cleaning staff, and website maintenance.
Low Startup Costs Average
According to the US Small Business Administration, most small businesses get off the ground for less than $5,000.
This surprisingly low start-up cost is due to two very successful small business models: the home-based sole proprietorship and the home-based franchise. Here are my best home business ideas.
The key to both of these is to limit startup costs by initially working out of your home. As a large percentage of businesses move away from physical locations and inventories, this is an increasingly viable option for many entrepreneurs.
Check out my list of the top low startup cost business ideas
Smart Startup Cost Tips
Many serial entrepreneurs endure one or multiple failures before enjoying their first success. It’s important not to expend a potentially crippling amount of resources before you have verified that there is a market for your new product or service.
Test market your new enterprise in a controlled setting and don’t be afraid to move on if there is little interest.
Know Your Break-Even Point
Every business has a break-even point. This is the bare minimum of revenue needed to begin turning a profit. Generally, the higher your fixed costs, the higher your break-even point.
If you are able to operate your business from home with a minimum of expenses, your break-even point may be very low. This is optimum for the ‘small start’ method I recommend to first-time entrepreneurs.
You will need to determine your labor needs and the associated costs. How many employees do you need? What are their hours? What is the average hourly wage of these types of employees?
The SBA reports that for every new employee that you add to your payroll it will cost up to 1.4X their salary in tax and other fees. Other associated labor costs include health insurance, recruiting fees, classified ads, employment agencies, payroll services, training, uniforms and taxes. Read more at the SBA website
Here is where you will add in your moderate salary as the manager of the company into your startup budget.
Product and service fees
Next calculate by researching prices for the various items you will need to deliver your products or services. In the case of products you will want to source vendors for your inventory or raw materials, components and packaging.
If you are offering a service there are also associated costs such as the price of textbooks if you are a language tutor for the costs of pressure washing equipment (and soap!) if you are offering power washing services.
Add in your advertising and marketing costs here. You will have an initial cost for website setup, logo development and launch ads. Then you will have an cost for continuing promotions and marketing activities. It is wise to expect to spend approximately 10% of gross sales on marketing. This means that if you estimate sales of $10,000 monthly, budget $1,000 for ads and promotions.
Special note on equipment
I strongly recommend that you consider starting your business with used equipment (that is serviceable), with warranties if possible, as opposed to buying brand-new. You will save tons of money which will be better spent on marketing your new business yielding a higher return on investment. When I started my cosmetic business I bought a used steam jacket mixer to blend body lotions that had previously made donuts!
This same applies to vehicles. I know it is tempting to buy a new vehicle to start a new business, however, it is a grave mistake.
Car lots are filled with late model trucks from guys (and gals) who bought a new vehicle and started a new business but could not make the payments. Instead use a serviceable vehicle (perhaps one of those gently used ones from overspending entreprepreneurs) and invest the difference in promotion and your business will grow stronger.
Don’t forget to include the necessary admin costs of billing your customers, collecting payments, accounting software, credit card fees and monthly bank account charges.
Working capital is undoubtedly the most important start-up expenses you will calculate and sadly for many failed businesses it is one they calculated incorrectly.
Working capital is the amount of money you need to KEEP in your business to pay for bills and ongoing expenses while you are waiting for customers to pay you or credit card payments to be deposited. Textbooks will explain it as the difference between Current Assets and Current Liabilities = Working Capital. But, for most business owners that definition is a bit confusing and not helpful. We need to focus on cash flow.
An excellent rule of thumb for adequate working capital / cash flow is to keep three times 3X the amount of monthly spending in the bank at all times. This means that if your firm spends $10,000 a month total(rent, salary, inventory, services) you should have a minimum of $30,000 in working capital in your liquid bank account.
So to quickly calculate your working capital needs in your startup budget, add up all your monthly expenses and multiply by 3.
In small business – Cash is King. Maintaining adequate capital in the form of cash flow will keep your small business doors open. Lack of working capital is the number one reason why businesses fail. Check out this practical cash flow advice from two seasoned entrepreneurs.
Startup Costs by Industry
My readers have requested detailed lists of startup costs for specific industries, so I compiled these articles below:
Tax Deduction and Depreciation
Because small business is an important driver of the local, regional, and national economy, the government engineers tax code to benefit the entrepreneur.
Generally, expenses related to opening a new business are tax-deductible, either in the first year or amortized over the first few years of operation.
While capital expenditures cannot be deducted, they can sometimes be written off your taxes through the process of depreciation.
Check out my guide on how to start your business right with tons of useful tips I learned by successfully starting, building, and selling multiple companies.