It’s hard to know for sure how much it will cost to start a business, but to avoid any unforeseen expenses it’s important to start planning early.
Preparation will be required to launch a successful business. You should begin estimating and researching to figure out what exactly the expenses will be to start your business.
What Are Business Start-Up Costs?
Before the business starts operating, start-up costs are the expenses that you will have. You will need to cover these expenses and bills before you launch your business. Your business will need to deal with specific start-up compared to other start-ups, however, yours will generally fall under either a serviced-based, brick-and-mortar or online organization.
Why Add Up the Business Start-Up Costs?
Determining your start-up costs will be a big part of creating a roadmap for your small business, much like your business plan. You can reduce your risks and stay on the right path even during the most volatile months when you have a rough estimate of what needs to be done.
Here are more reasons why you should be adding up the expenses for your start-up:
Every Business is Different
There is no simple way to determine your start-up costs, every industry and business needs will be different and have different expenses. You can still make an accurate guess that will reflect the needs of your business.
For example, if you’re going to start a SaaS business you will need to take into account the additional server or online tools expenses to keep your client’s sites up and running. However, an online or brick-and-mortar clothing store will only need to account for the shipping expenses and physical inventory.
Establish a Firm Foundation
Many entrepreneurs start their small businesses in an unplanned, haphazard way when they underestimate their start-up costs. It will be more difficult to maintain even though it might work at first in the short term. New customers will often be cautious of a new business with makeshift logistics and managing your start-up costs can be almost impossible until you accurately add them together.
Build a Financial Plan
A financial plan will be an overview of your current estimates for growth and business financial. One of the key elements of building a financial plan is by having realistic start-up costs, even if they are just an estimate. It can be a big help to understand what it will take to start your business:
- Estimate profits
- Carry out a breakeven evaluation
- Broaden the cash burn rate of your business
- Pinpoint possible tax deductions
Throughout the life of your business, you will need to consistently revisit your financial plan to be able to successfully leverage it. During your reviews having these estimates, early on will give you a good baseline to work with. You will know if you need to make any adjustments to your estimates or if they are realistic after a few months of running your business.
A properly developed business plan can go a long way to ensuring you have a solid future for your business. Not to mention the ability to use the busienss plan to access government funding to cover those business start-up costs.
Attract Investors and Secure Loans
Lenders and investors will want to have an understanding of the roadmap that you have put in place for your business. Questions about your sources of revenue, business model, initial start-up costs, and growth forecasts will need to quickly be answered. They need to be able to see that you have thought about what it will take to start, operate, and grow and also see that your business is a sustainable one.
In this case, it will be a necessity to have a realistic set of start-up costs already laid out. It will give your investors a better idea of you will be intending to run your business by being able to show them how you think your expenses will remain the same or change over time.
How to Determine Your Business Start-Up Expenses
It will be a mixture of testing, market research, and educational guessing, the same as when writing out your business plan or predicting your initial sales. Based on the actual results, it will be up to you to make any adjustments over time.
You can look at your industry benchmarks and competition for the specific expense categories if you need help to find a good starting point. You can use this information to confirm the estimates that you have that will be based on the current market factors and not just copy the expenses you find directly. You just might see that you have a cost advantage based on a healthy relationship with your vendors or a common expense that you are able to avoid based on the model of your business.
You can start by making this list if you’re wondering how to actually estimate the costs to start your business.
1. Business Start-Up Expenses
These are the expenses that your business will have before you bring in any revenue after you launch. These can be split into ongoing and one-time expenses. You will have a more accurate estimate of what it takes to launch your business by separating them this way. For both categories, these are some common expenses to start considering:
- Licenses and permits
- Incorporation fees
- Logo design
- Website design
- Business card and brochure printing
- Down payment on rental property
- Improvement to your chosen location
- Loan payments
- Legal services
- Insurance payments
- Marketing costs
This is just a handful of the costs that you will need to consider. Some may operate as variable costs, others will stay fixed, and others may shift between one and another over time. You will be able to keep better track of your expenses and identify any options to cut costs over time by having them written out this way from the beginning.
See how you can get government funding to cover your business start-up costs using the Funding Database.
2. Start-Up Assets
These are long-term assets that you need to purchase to get your business started and the costs associated with them. There are other common assets that you might have to invest in other than having cash as the most basic start-up asset:
- Tech equipment such as computers
- Office equipment
Why Keep Assets and Expenses Separate?
Keeping your assets and expenses separate has a valid reason why you should do so. Expenses can reduce your taxable income since they are deductible against the income of your business. On the other hand, your assets will not be deductible against the income of your business.
You will potentially save yourself some money by keeping the two separate. Also, you can avoid overstating your assets on your business’s balance sheet by accurately keeping track of your expenses. Having useless or unfounded assets can make your books look bloated and will possibly make them look inaccurate even though generally having more assets for your business can be a better look.
When starting a new business, listing these out separately will be good practice and will lead to our final piece for you to consider when determining the start-up costs of your business.
3. Cash Required to Get Started
When your business starts, the cash requirements will be an estimate of how much money you will need for your small business. The money you have raised either through loans or investments minus the cash you will spend on assets and expenses will be your cash balance to the date your business starts.
This will be the final piece to the getting your business started puzzle you need. Keep an eye on your projections for cash flow as you build your plan. You will either need to reduce your expenses or increase your financing if your cash balance drops below zero.
How Much Cash do you need?
So that they can have more money left over for any contingencies, many aspiring entrepreneurs will decide that they want to raise more money than they will need. This can be difficult to explain to an investor even though it does make good sense. Since it’s their money, they don’t want to give any more than you will need.
Many experts will suggest that you should have anywhere from six months to a year’s worth of your expenses covered with your starting cash. This isn’t very practical even though it sounds like a great concept to give you some peace of mind. This can interfere with your estimates and mitigates their value.
You can calculate the deficit spending that you will most likely encounter during the early months of the life of your business to have a better estimate of what you will really need in your starting cash balance. You can then estimate from there how much money you will need when moving forward until you are able to hit a steady break-even point many months and even years after you have opened.
How to Estimate the Cost of Your Expenses
Now it’s time to put your potential expenses, starting cash, and assets together and get an estimate of your full costs to start your business. There are multiple ways to determine the start-up costs of a business.
The simplest method used in determining your expenses is to write down each of the requirements you have to have (costs) that will enable you to start up.
This will include anything that is necessary such as tools, requirements, website development, office rent..etc
Keep in mind that determining your startup expenses, you may have to do a bit of digging to determine all that you need.
Once you have those figured out, what are the start-up expenses you have to have to consider to build the business. These will be your operational costs.
Things like payroll, marketing costs, utilities..etc
What to Consider When Estimating Business Costs for Start-Up
Normal Operations vs. Pre-Launch
The launch date is the defining point when using our definition of starting costs. Expenses such as payroll and rent before launch are start-up expenses. These same expenses after the launch of the business are considered ongoing or operating expenses. There are also many businesses that also have some payroll expenses because they need to hire people to train before they launch, stock shelves, develop their website, and so on before they launch.
This can also be the same for assets. For example, the inventory that is paid for before and available at the launch of the business is included in the starting assets. Cash flow will be affected by inventory that is purchased after launch, the balance sheet will also be affected, however, is not considered to be part of the starting costs.
You should ensure to have an accurate definition of the cutoff for start-up costs and ongoing expenses. When you have an outline of everything within a specific category, this transition will be very easy and simple to keep track of.
Your Launch Month Will Be at the Start of Your Fiscal Year
Your analysis can be influenced by the establishment of a standard fiscal year.
Establishing the fiscal year of your business as starting at the same month that your business launches can be very convenient. The start-up costs and funding will match the fiscal year in this case, they also happen at the same time before the launch and begin on the first operational fiscal year. Even if they occur within just a few months, or even one month the pre-launch transactions will be reported as a separate tax year. So the last month of the fiscal year will also be the last month of the pre-launch period.
Take Start-Up Financing into Consideration as Part of Your Costs
Start-up financing isn’t necessarily part of the estimate for starting costs. However, to get started in the real world, you will need to estimate the starting costs to determine what the start-up financing will be that will cover them. It’s important to consider these at first because the type of financing you go for may alter your ongoing or start-up costs in a given period.
Here are some options for financing to consider:
- Investment: This is what someone else or you put into the business. In the balance sheet, this is shown as paid-in capital. This is the classic tale of business investment, take ownership of the business, risk money in the belief of earning money later.
- Accounts payable: According to your balance sheet, these are debts that are outstanding or need to be paid after some time. This is typically credit card debt. This is shown on your balance sheet as the starting balance.
- Current borrowing: This is standard debt, borrowing from a bank, small business administration, or other current borrowings.
- Other current liabilities: These are liabilities that don’t have charges for interest. Loans from friends, family, and founders will be put here. We’re not necessarily recommending any interest-free loans for financing, but if they do happen, this is where they would go.
- Long-term liabilities: Long-term loans or debt.
Have Long-Term Success from Realistic Start-Up Costs
Whether you are using the traditional method or the innovative method for estimating your start-up costs, you should be sure that you have considered every aspect of the related costs for your business. Doing this will give your small business a better chance at attracting investors, securing loans, estimating profits, and understanding the cash burn rate of your business.
You will have a more accurate vision for the immediate future of your business by having an accurate layout of the start-up costs for your business and making adjustments as needed.
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