5 easy steps to determine your start-up costs
When considering starting a business, it’s easy to get lost in the numbers. It is essential to have a clear idea of the amount of start-up money you will need to avoid cash flow problems until your business begins to generate profit.
Why do I need to know my start-up costs?
Calculating your start-up costs gives you more than just peace of mind. Knowing how much money you need to get started can help you:
● Write your business plan. Every startup needs a business plan that includes a complete list of expenses. The financial part of your business plan should include both costs and assets. From there, you can calculate if you need financing and when you will make a profit.
● Plan your growth. Once you have defined your finances, you can create a growth strategy for your business. Knowing your costs is essential in determining when you can afford to develop new products, hire a larger team, or open a new location.
● Apply for funding. Whether you want to establish a line of credit or obtain a Small Business Administration (SBA) loan, most lenders will ask you about your costs. With your list of expenses and assets, you can clearly show why you owe request funding.
● Look for investors. If you aim to partner with investors or venture capitalists (VCs), you need detailed financial data. Investors often ask to see your start-up costs and expenses to calculate how soon they can get their money back..
How to calculate start-up costs
Adding up the costs of starting a small business requires both research and math. Follow these five steps to assess your start-up expenses.
1. Identify your expenses
Start by noting the start-up costs you’ve already incurred, but don’t stop there. Research the expenses that you are likely to encounter as your business gets closer to launch. Consider these standard start-up costs:
- Business registration fees: Unless you are a sole proprietorship, you must register your business with the state. Most startups must choose a business structure and file documents with the Secretary of State.
- Commercial licenses: Many states require certain types of businesses to be licensed. For example, you may need to pay for a license if you stream online or on TV, or if you take care of children or pets.
- Equipment: Most businesses need some type of equipment to make products or perform day-to-day tasks. Add up your business expenses for items like computers, smartphones, vehicles, and production systems.
- Stationery: Most businesses also buy basic necessities ranging from pens and paper clips to paper and printer cartridges.
- Consultants: Consider any fees you might pay another company to provide advice or help develop a strategy. Other examples include working with a management analyst or a recruiting expert.
- Pay: This amount should include what you pay your employees and management team as well as yourself.
- Assurance: Calculate both the costs of health insurance and any business insurance you need.
- Office: Whether you are renting an office or paying for a warehouse, write these costs down.
- Inventory: If your business sells products, consider the cost of inventory on hand.
- Marketing: Project your potential costs for marketing your business. Yours might include managing social media, partnering with influencers, or advertising through traditional channels like radio, print, or television.
- Website: Remember to factor in the cost of developing and maintaining your website as well as creating content for it.
- Taxes: Every business pays income tax. Depending on your business, you can also pay sales tax or payroll tax.
- An accountant: Businesses of all sizes often depend on accountants to balance financial books, prepare tax returns, and produce reports.
- Legal: Take into account the fees you pay a lawyer to draft contracts or to help you comply with industry regulations.
2. Estimate your costs
Once you have compiled a list of your business needs, write down the average cost for each category.
Check with your state’s government offices to determine business registration and licensing fees. To estimate the costs of equipment and supplies, you can shop online or request a quote from a supplier.
For other standard costs, you can choose to set aside a percentage of your total budget. For example, many startups budget up to 10% for marketing and at least 20% for business taxes.
3. Do the math
After you’ve estimated your costs, divide the list into one-time and ongoing expenses. Make sure all running expenses reflect a monthly average. Add up your one-time expenses and multiply your current expenses by the number of months until your launch.
The total represents your estimated start-up costs. For example, your list might look like this:
- Business registration fees
- Commercial licenses
- An accountant
4. Add a cushion
Even with a business plan in place, your startup could experience delays and setbacks. Make sure you have enough funds to keep your startup afloat by giving your expenses an extra cushion. Consider budgeting enough to support your business for up to 12 months beyond the target launch date.
5. Put the numbers to work
Finally, run your calculations. Consider fixed and variable costs to help you establish a pricing structure for your products and services. Include your start-up costs in your business plan to help you estimate when your business will become profitable. You can also use your expense sheet to see what type of financing options are available to you from banks, investors and venture capital firms.
Start your business on a solid foundation
Starting a business requires you to follow a disciplined path with countless twists and turns. You can increase your chances of winning the startup game by taking the time to calculate your costs and manage your business expenses.