How do you plan for your business startup costs? Here’s how to estimate what your small business will cost to establish, along with how to realistically prepare for those expected costs.
Starting a new company comes with a long list of things to research and estimate. At the top of the list is what your startup idea will cost to get going. It’s what keeps most potential business owners from ever opening their doors or launching their websites. But these costs can be reliably determined beforehand!
The good news is that when you calculate your small business investment correctly, it reduces your risk and increases your chance of success. You’ll understand what you need and will know in advance if you require a loan or investors. You’ll also know the exact point at which you should turn a profit.
These are some of the best ways to identify your business expenses, plan for them, and make sure that you understand all of the costs involved with launching your new venture. Here are some important questions to ask yourself.
What Does It Cost to Start a Business?
Your startup costs are directly related to the choices you make for your business. According to the Ewing Marion Kauffman Foundation, the average cost of starting a new company from the ground up is around $30,000. The fact is that every business is different.
- 7 out of 10 entrepreneurs started their companies with less than $25,000
- 4 out of 10 started their companies with less than $5,000
Your startup idea might require a much higher small business investment or a much lower one. It depends on two important factors.
Your business model: This is how you’ve planned to make a profit. Your business success relies on the elements of your business model—what your products and services are, who your customers are, and what expenses you’re bound to incur. See examples here.
Your industry: This is the niche where your business belongs. Industries are really just groups of businesses that produce a specific type of product or service.
Your business model should be detailed fairly extensively in your business plan. It tells investors who you are, what you do, and how what you’re selling is going to bring in the big bucks. Your costs will vary according to the industry you’ve chosen and the model you’ve built.
Tip 1: Your model and industry determine your costs.
What Startup Costs Will I Need to Cover?
There are a number of expenses that you can expect for any new company. First, you’ll need to understand the type of cost and then the potential setup costs.
There are 3 main groups of costs:
- One-off or ongoing: Will you have ongoing monthly expenses or one-time purchases?
- Fixed or variable: Will they be consistent (fixed) or variable from month to month?
- Essential or optional: Will they be necessary for the company or optional?
Most costs fall into these zones. When drafting your expenses list, keep them in mind for accurate calculations. To get an idea of the types of startup costs you could incur, here are a few to consider for your own model.
- Incorporation costs: Under $300
- Licensing and permits: Variable
- Business Consultants: Up to $5,000 a year
- Travel: Variable
- Taxes: Variable
- Insurance: $1,200 a year on average
- Website: Upwards of $40 a month
- Marketing: Up to 10% of your total budget
- Software: a few hundred dollars
- Shipping: Variable
- Office space: Anywhere between $100-$1000 per employee, per month
- Office furniture/supplies: 10% of total budget
- Utilities: $2 per square foot of office space
- Equipment: $10,000-$125,000
- Inventory: Up to 25% of total budget
- Payroll: Up to 50% of the total budget
Your time investment isn’t measured financially, but it should be considered. For example, many small business owners dedicate months of their own time to building their business websites or performing their own marketing activities to save money. Time, however, has a financial cost.
Tip 2: Your model determines your setup and running costs.
How Do I Plan to Afford These Costs?
It’s important to get your business off to a strong start, but there are risks, and this can be a source of worry for many business owners. It’s because there’s a period of time before your business makes money when you’ve invested as an entrepreneur but haven’t seen any returns.
That’s what a startup is, by definition—an unproven model brought into an uncertain market.
Your business model has to work. Otherwise, you won’t be able to cover your personal costs—your mortgage, health insurance, and car payments, for example. The way that you fund your company must be informed by a competent business plan.
Here’s how to fund a startup business:
- Use your personal credit card. According to a Lendio survey, 77% of startups are funded with personal funds.
- Take a microloan. In 2019, the average small business microloan was $14,735 with a 7.5% interest rate.
- Opt for a small business loan. Remember that your interest rate changes depending on the industry you’ve chosen. These can be tough to secure, according to recent studies.
- Get vendor credit. Find suppliers who will front you the products to sell and delay the payments to a later date.
- Find investors. Ask friends and family, list yourself on investor sites, or pitch your idea to investors who are interested in models like yours.
- Crowdfund. Not the most reliable way to fund a startup, but it can work with the right story. Crowdfunding invites many public donors to invest in your company.
Planning to afford your startup costs means knowing what those costs are and how long it will take to generate revenue. That’s why keeping costs low is essential.
To minimize costs, try shopping around for bargains, seek out the types of funding that won’t cripple your company, and find affordable solutions wherever you can.
There are all-in-one business services that combine several traditionally costly elements of starting your business. These services reduce costs, save you time, and provide support.
Create a business plan, track your finances, get web design and hosting, list in online directories, set up your point of sales, start marketing, and finalize your legal permits and licenses with a single service.
Tip 3: Reduce costs by funding wisely and investing in an all-in-one business service.
Which Industry Should I Choose?
There are many industries to choose from, and some are more costly than others. With the current climate, it’s a good idea to keep your startup costs low and your products and services online.
A traditional restaurant model, for example, isn’t great in a world dealing with the coronavirus. If you switch to an online delivery model, however, the startup could have viability. Industry selection is so important when you’re looking to build a successful startup.
- Most microbusinesses cost $3,000 to start
- Home-based businesses cost between $2,000 and $5,000 to start
With an e-commerce startup, your risk is low, because you eliminate the need for office space, utilities, and a number of other costly expenses. Plus, you’re in a fast-growth industry that only gets stronger when disruptive change brings the economy to its knees.
Carefully consider the industry you choose but build a business model that functions online. That way, you’ll reduce your chance of failure and insulate yourself from current disruption.
Tip 4: Combine a fast-growth industry with an online business model.
Your chosen business model and industry will determine your costs. Understand the economic setup and material running costs involved in your choices. Make a list of what you’ll need and know when you’ll start seeing a profit. To reduce risk, reduce your costs, and choose the right funding sources.
Follow these steps to plan for your startup costs and know exactly where you’re going. When you do, you won’t feel anxious about the period of time between startup and profit!