When you enter a new venture, the business startup cost is the most crucial aspect and can be daunting if you don’t plan them well.
You do significant research on the idea and products you are developing but may not be clear as to what all expenses you will incur, how you can save your costs, and how to calculate the same. You may face liquidity or working capital issues going forward.
So, how can you save your business startup from falling out of cash?
This article explains everything you need to know about your business startup costs, how to calculate them, things to consider while calculating these costs, and how to save on them.
Before we jump on to understanding how to calculate the startup costs, let’s try to understand these startup costs and which costs are considered initial startup costs?
Understanding the Business Startup Costs
Your business startup costs are the initial expenses you make to launch your business and get it recognized among many customers. The cost of starting a business help you understand how much money you will need to launch your product to the customers.
The research shows that the restaurants, medical offices, and manufacturing companies are the most expensive small businesses and startups to launch since they require more than $100,000 as their startup costs.
It could be confusing which costs to consider as your initial startup cost. The information below will help you understand the costs regarded as startup costs.
Which Costs are Considered as Startup Costs for Your Business?
Calculating an estimated cost of starting a business is essential and requires your business prudence, whereas understanding which costs to include is a primary requirement before calculating them. The below list can help you understand these costs in detail.
Startup Costs for your Business
Company Incorporation Fees
Research and Development (R&D) Cost
Other Small Business Startup Costs
Company Incorporation Fees
These costs include all costs incurred for the company set up, such as registration fees, filing fees for articles of incorporation, federal or state licensing fees, etc. Hence, these are the costs incurred from a legal viewpoint to set up your company.
Research and Development (R&D) Cost
These are the most crucial costs that research the product or service you offer and develop the product as per the idea that originated in your mind. While many startups require substantial R&D costs, others don’t need to incur so many expenses.
Most manufacturing startup companies need major equipment to produce their products. The equipment cost includes those plants and machinery costs that you need to start manufacturing your items.
Be it a service company or a manufacturing plant, you will need an office either on rent or self-occupied to run your business. Your office space's rent expense or purchase cost is added to your business startup costs.
No one knows your product or service when you start your business. To get recognized in the market, you need to advertise your products, and below are the different types of marketing costs added to your costs.
- Website Development: You incur website development costs when you want to launch your products in the market and use online marketing to make your presence felt across the globe.
- Content Creation: The content published on the website also costs you as your costs and hence, they are also part of your marketing costs.
- Advertisement Costs: You will need to advertise your product or service on the web, in social media, in newspapers, or on television, and these costs are your advertisement costs.
When you are in retail, wholesale, manufacturing, or trading business, you need to maintain certain levels of inventory in order to meet your customers’ demands. At the same time, you will need to sell them as soon as possible to make them profitable. These initial inventory costs are your startup costs.
You will need office tables, chairs, air conditioners, storage racks, laptops, etc., for your office, and these are your one-time startup costs.
While you start your new venture, you will also have to bear the utility expenses such as electricity, internet, telephone, etc.
Payroll expenses are another most crucial component of your startup costs. Salaries and other benefits require a significant portion of your expenses.
Moreover, many founders don’t even take wages initially. However, you should always consider their salary costs in consideration to derive a reasonable estimate of your costs.
Professional consultants like Certified Public Accountants and legal advisors are required at every stage of your startup’s growth. While starting your new business, these professionals can take care of your following requirements:
Packing materials, postage, etc., can be your shipping costs if you are a retailer or wholesaler selling and delivering goods to your consumers. These costs may vary for different types of businesses.
TaxesDifferent states will have their own sales tax policy; hence, not all states have sales or excise tax implemented, and the rates of these taxes will also vary.
Other Small Business Startup Costs
Apart from the above, the cost of starting a business may include traveling costs, insurance costs, distribution costs, customer acquisition expenses, etc.
The costs mentioned above cover almost all startup costs for a business, and other costs may include costs that vary from one company to another.
Why Should You Know Your Startup Costs?
Estimating your expenses is vital and requires sincere efforts from each technical person involved in building your startup product. Read on to know the importance of the business startup costs and what purposes it caters to.
- Fundraising: Your new business startup will need initial capital to set up the company and incur other expenses when you are not generating revenue. In such times, you will need to raise funds, and the banks or other investors would require the details of your costs.
- Plan for business growth: When you understand your initial setup costs, you can prepare a well-structured strategy for your business growth, as it will give you an estimate of how much more money you will have to put in while planning for growth.
- Strategy for revenue generation: These costs will help you understand approximately when you will start generating revenue and how you can strategize your plans to recover the initial costs and start doing a profitable business.
- Attract investors: Your understanding of your costs will help potential investors know that your research is intense, and you know how to recover your costs and plan to increase the gross margin.
Hence, it is imperative to understand your startup costs and how to save them. Let’s learn how you can calculate these costs.
How to Calculate Startup Costs for Your Business?
There is no complex formula to calculate the costs; you just need to make a total of your estimated costs. However, the estimation procedure requires thought-through research and a comprehensive understanding of what you will spend.
Below are the steps to help you calculate your business startup costs correctly.
Identify What You Will Spend
In the first step, you will have to identify what expenses you will incur to launch your business. We already understood a broad category of expenses every startup company will encounter.
However, specific companies will have special types of costs, such as medical startup companies with pharma and medicinal expenses, in addition to their intense research costs.
You will also need to get quotations from various suppliers, professionals, and freelancers to estimate these expenses.
Categorize Your Expenses
Once you have a tentative list of your expenses, you can categorize them as office expenses, raw material purchases, marketing expenses, capital expenses, etc. However, not all costs can be precisely categorized; hence, you may classify them under miscellaneous or other costs.List out all costs that come to your mind in an excel sheet, and from there, you can start categorizing them.
Make an Estimation of Your Costs
In this estimation step; you will have to use your general prudence so that your estimations are not far away from the actual expenses. Assuming an average cost for each category is okay since you would not know the actual cost until you incur it.
Alternatively, you can also allocate a fixed percentage of your budgeted costs and make estimations. For example, if your budget allows you to spend $50,000 on your total costs, you may estimate to spend 10% of the total costs ($5,000) on office furniture and other items.
Calculate the One-time and Recurring Costs
It is evident that not all startup costs are recurring, and most of these costs would be one-time. For example, your office furniture costs would be one-time costs while salary expenses are regular.
You can also make a list of one-time and recurring costs as follows:
- Office space
- Company incorporation fees
- Office furniture
- Website development expenses
- Equipment costs
- Raw materials
- Consultants’ fees
- Office rent
- Marketing expenses
Let’s see an example of the business startup costs and how you should present them:
|Startup costs - Lisa’s Creations|
|First month’s rent||$1,000|
|Kitchen pantry utensils||$3,400|
|Table and chair||$9,000|
|Hair shampoo and conditioners||$1,800|
|License and permits||$1,000|
|Accounting and invoicing software||$370|
|Total funds required||$32,000|
|Repairs and maintenance||$300|
|Other admin expenses||$150|
|Total monthly expenses||$8,950|
|Total startup costs||$40,950|
Things to Consider While Calculating Small Business Startup Costs
Your estimated expenses are not the actual expenses, and hence, you will have to be careful while evaluating these costs. The below tips will help you calculate the cost of starting a business effectively.
- Have sufficient funds to sustain your business
- Plan and start acting as budgeted
- Be reasonable, don’t overestimate
- Maintain a spreadsheet for your costs
- Revisit your expenses to check any variances
Your initial expenses may be huge since they will also include those one-time costs, however, there are specific ways through which you can save a few dollars.
How to Save on Startup Costs?
Initially, when you are not generating any revenue, it is important to save every dollar you have and spend it wisely. Below are the tips you can use to save on your startup costs:
In the beginning, when you have less clarity on the day-to-day tasks, you can work with the freelancers instead of hiring full-time employees since the freelancers will only charge for the work they do.
Try Co-working or Home Offices
You can also save a considerable amount of your costs by working from home or using co-working spaces. Especially, business owners in service industries do not need much office space.
Follow BYOD Principle
You can also ask your team members to bring their own laptops so that you do not need to spend much on hardware. The bring your own device (BYOD) concept can help you save your costs, and you can use them to make more meaningful purchases.
Outsource Certain Services
In the beginning, you will not have many accounting entries to be recorded, and your other compliances may also not be that frequent. Hence, you may outsource such services to professional agencies instead of hiring full-time accountants or compliance officers.
You can prepare a budget with the flexibility to allow any delay or uncertainty so that you do not have any significant variances when you incur the expenses in real.
Understand Tax Benefits
Many times, the government provides specific relief or tax benefits to the newly set up companies. You should understand such tax deductions and benefits wisely to save on your tax expenses.
Negotiate and Discuss
It is advisable to negotiate with suppliers, contractors, and freelancers since you also need to run your business. When you discuss various possibilities, you may save on your estimated costs.
Your business startup costs are the center of attraction for the investors, lenders, and other stakeholders. You will have countless turns or twists while starting your company. You should always consider various situations and estimate your startup costs effectively.
How Can We Help?
We at Upmetrics can help you estimate your startup costs using our software tool. Experience a faster and more efficient way of the business startup cost estimation as we can also help you write your business plan and offer solutions for financial reporting.
Request your free demo to know more about the solutions we offer.