Congratulations, you have a great business idea. You've done research on how to get started, and now you need to figure out how much it will cost and how you’re going to pay for it. Many entrepreneurs underestimate the expenses associated with starting a company, and this leads to failure for many new small businesses.
Every business endeavor requires spending money before even opening the doors. Initial startup expenses are those incurred before your business is up and running. Along with these expenses, you need to estimate your ongoing costs. Cost estimates will be your basis for setting prices and rates, analyzing your profitability, and applying for loans, so it's important not to overlook anything.
Knowing Your Startup Costs
Your startup costs are purchases you make and fees you pay to get your business up and running. There are several types of small business costs:
- One-time costs are payments, purchases, or investments made only when your business is first starting up.
- Ongoing costs include payments you have to address on a regular basis.
- Fixed costs are predictable, including rent and loan payments.
- Variable costs, such as emergency repairs, require planning due to their unpredictable nature.
- Essential costs cover things your business can’t do without, such as inventory or basic equipment.
- Optional costs are “extras” you can invest in later to improve your business.
Most costs can be categorized as either assets or expenses and should be broken down and analyzed when you estimate your startup costs.
What are Your Assets?
An asset is a tangible resource belonging to your business that still has value after a year or more. Some assets increase in value over time and some decrease over time, and most require an initial investment.
Examples of assets include:
- Cash: This is money your business has in the bank, usually representing the owner's personal investment in the company.
- Land and buildings: This is any property the business owns and from which it operates. You should list the purchase price and not the current value for an accurate record of your investment.
- Improvements: This refers to any money spent fixing up the location, such as painting, putting in new flooring, repaving the parking lot, or doing interior redecorating.
- Office furniture: Desks, tables, chairs, shelving, and small appliances fall into this category.
- Signage: This includes both outdoor and indoor signs used to attract customers.
- Plant and equipment: These costs vary depending on the type of business you’re starting. For example, operating a restaurant requires investing in more large equipment than running a retail store.
- Starting inventory: If your business sells a product, you should include the money you need to spend on stocking your initial inventory.
Money brought into the business by investors or through loans also counts as an asset. However, since you have to make payments on these sources of financing, they also count as expenses and should be categorized along with similar types of payments.
What are your Expenses?
An expense is something you spend money on but don’t get to keep, like a service, inventory, or products with finite usefulness.
Examples of expenses include:
- Security deposit and rent: Most businesses find and lease a location before they open, and this can represent a significant small business cost.
- Legal Fees: Money spent on licenses or registering your business, legal advice on starting a business, corporate taxes, and other necessities to keep in compliance with business laws.
- Insurance: Any insurance costs you need to pay before your business opens, including workers’ compensation and liability.
- Marketing: Money spent on all forms of advertising, including traditional and online platforms.
- Miscellaneous: Any other expenses you’ve paid toward your business before it opens. Include detailed descriptions of these expenses when estimating startup costs.
Do You have Recurring Costs or Overhead?
You also need to calculate the monthly cost of doing business for at least the first six months and possibly up to a year. Otherwise, you may have trouble covering your expenses until you start generating a consistent stream of revenue.
Anything requiring a monthly payment, including rent, utility bills, payroll, and loan payments, counts as a regular cost of doing business. To ensure you can meet these payments, take the time to create detailed cash flow projections based on current market conditions.
What Startup Cost Estimates Mean:
The sum of your startup and recurring costs tells you approximately how much money you need to get your business off the ground. Once you have this estimate, start planning how you’re going to finance the start of your business. You may discover you need a business loan to stay afloat during the initial phases of startup, and this additional cost should be factored into your projections.
Using financial planning software or working with a financial advisor can help you keep everything straight. Expect to take a loss at the start, but keep a careful eye on cash flow to ensure the overall trend progresses in an upward direction as your business starts to grow.