How to Calculate Business Startup Costs

1. Equipment and tools

It’s no surprise we’re starting the list with equipment and tools. There’s no way a business can operate without the necessary equipment. The equipment costs may range from $10,000 to $120,000. However, these costs will entirely depend on the business type and equipment requirements.

For instance, starting a food truck would require financing a food truck and expensive kitchen equipment, while starting a small daycare would only require purchasing a few play area equipment.

Here are the average equipment costs for some of the popular business types:

• Restaurant and food trucks: $24,000 to $120,000+
• Small Bakery: $6,000 to $8,000
• Clothing line: $2,000 to $15,000+
• Construction: $10,000 to $50,000
• Law firm: $5,000 to $25,000+
• Barbershop: $1,000 to $2,000

2. Incorporation fees

The first thing you should do is choose a business entity when you plan to form a new business. The most common and preferred business structure types include sole proprietorship, partnership, corporation, and LLC.

The business incorporation or filing fees can range from $50 to $725 in the United States depending on your industry, the state you operate in, and the business structure you choose.

However, the average incorporation fee is $300 in the majority of the states in the US. You may contact your secretary of state’s website to learn more about the filing fees or process for the articles of incorporation or articles of organization.

3. Business licensing and permits

Operating any small business requires specific licenses and permits depending on the industry compliance and regulations. For instance, a trucking company requires a USDOT number, heavy vehicle use tax, and others, while a restaurant may need licenses like food safety and liquor licenses to operate.

Similar to different filing fees for other business structures, the business licensing and permit fees vary depending on the business industry and regulatory compliance. You can expect to spend between $1,000 to $5,000 for your licensing and permitting requirements.

4. Office or retail space

If you’re starting a small business that can be operated from home like a home bakery or an online clothing store, you may not have to worry about office space costs.

But if it’s not the case, paying for an office or a retail space would make up a sizable portion of your fixed expenses, no matter whether you rent or buy the place.

Based on our research, you should spend around $100 to $1200 per employee monthly on your workspace.

However, the actual office space expense will entirely depend on your location and the type of space you’re using.

5. Legal and professional fees

Professional and legal fees may sound like an additional expense while starting up with limited resources, but it’s essential to ensure compliance with regulations and maintain accurate financial records.

You may choose legal assistance for business licensing, EIN registration, and legal paperwork, a business consultant for market research and strategic planning, and an accountant for bookkeeping and tax planning.

You can hire these professional consultants on an hourly basis; their services typically cost around $40 to $150 per hour.  You should spend around $2,000 to $10,000 per year on professional and legal fees.

6. Inventory

Retail, wholesale, distribution, and manufacturing—if your small business falls under any of the mentioned categories, you need an inventory to operate your business. Finding the ideal inventory size to carry can be challenging when entering a new marketplace.

You want to attract more and more customers and make sales in your early days. However, you can’t also risk having too much inventory since it can increase spoilage.

Consider allocating 15% to 25% of your budget to inventory, depending on your industry. You will eventually learn more about inventory management once your business starts operating and making sales.

7. Marketing and advertising

Although it’s an optional expense, marketing is something worth investing in. Your marketing expenses may include physical materials like sign boards, banners, hoarding, paid social media advertising and search ads, or money paid to marketing agencies or consultants.

It is suggested to keep your advertising and promotion costs under 10% of your budget. If you’re working on a really tight budget, there’s no need to spend big bucks on marketing or hire fancy consultants or agencies.

With social media being a free marketing platform, over 47% of small business owners run their marketing efforts themselves, and you can do it, too.

8. Website development

A business website is like an online office where customers can contact you, learn more about your offerings, and seek assistance.

When building a website, make sure it looks professional, is easy to navigate, and displays the relevant information about your product and service offerings, as well as the contact information.

You can either develop a business website using website builders like Wix and Squarespace or hire a developer to do it for you.

Creating a website can range between $1,000 to $10,000 when you hire a developer, whereas you can do it on your own with website builders by spending around 40 dollars a month.

9. Business Insurance

Like you have a house, car, and health insurance, you need business insurance to ensure your business remains intact in troublesome and inevitable times, be it a natural disaster or a customer filing a lawsuit against your business.

The level of security and type of business insurance your business will require depends entirely on your business, industry, and the number of employees you have. For instance, a big-scale manufacturing company with over a thousand employees would require much stronger insurance compared to a home bakery.

Some of the must-have business insurance types include:

• General liability insurance—for all online, offline, and home-based businesses.
• Worker’s compensation insurance—for businesses with 1 or more employees.
• Professional liability insurance—for businesses offering consulting services.

You must expect to spend approximately $500 to $1500 annually on business insurance.

10. Payroll

Payroll is undoubtedly one of the major business expenses most businesses incur. However, there’s no denying how crucial it is to hire quality employees to make your business thrive.

Of course, payroll expenses are employee salaries, but there’s more to it. Your payroll expenses may also include:

• Incentive or bonus
• Commissions
• Paid time off
• Overtime pay
• Travel allowance
• Other benefits

Most businesses spend around 20% to 50% of their monthly budget on payroll. It can be more or less for your business depending on your business and the number of employees you have.

11. Office furniture and supplies

Those planning to have a traditional nine-to-five corporate workplace, be ready to spend some severe bucks on office furniture and office supplies.

When you operate from a corporate workspace, you need a desk, chair, telephone extension, computer, computer programs like accounting software, and, of course, a coffee machine or two.

The cost of furniture and supplies depends solely on your employee strength and the size of the office. However, it’s recommended to keep your furniture and supply costs to 10% of your total startup costs.

12. Utilities

No matter whether you plan to rent or purchase a workspace, you are bound to pay utility bills that include electricity, gas, water, internet, and phone bills for your office.

Unlike other fixed costs, it’s hard to estimate utility expenses, but the average cost of utilities for commercial buildings is $2.10 per square foot, according to a report by Iota Communications.

Besides the electricity, internet, and phone bills, the utility expenses may also incur the HVAC unit installation costs. This heating and cooling system will add a few additional thousand dollars to your startup expenses.

13. Business taxes

How much you’d spend on business taxes will depend on your business entity, tax-deductible expenses, and revenue. Since it’s hard to predict your revenue, estimating the exact amount to allocate for tax preparation may feel a bit challenging.

Under US federal law, corporations pay a flat 21% corporate income tax. If you’re a pass-through entity(a legal entity that passes all its income on to the owners), the business income or losses will pass through to your personal taxes.

However, you, as a pass-through entity, can claim a 20% deduction on income before paying taxes.

 14. Other expenses

Since you’ve reached this section, you must already have a clear understanding of all the expected startup costs, whether they are one-time or recurring expenses.

Here, we will discuss the other costs most small business owners tend to miss or overlook while estimating the startup costs—research expenses and borrowing costs.

Capital is required for starting a business, and equity financing and debt financing are considered to be the most preferred ways to acquire the initial working capital.

Equity financing, however, does not apply to most small businesses since it requires stock issuance. So, securing a small business loan seems to be the most likely source of debt financing for small business owners.

Research expenses, on the other hand, are the expenses incurred even before you started operating, spent on conducting a careful industry analysis and market research.

When calculating your startup costs, make sure to include these two as well.

Since we have already discussed common business expenses, let’s move on discussing calculating the startup costs.

How to Calculate the Costs of Starting a Business

There are various ways to calculate the cost of starting a business. Still, drafting a business plan remains the best way to estimate startup costs.

The financial forecasting section of your plan provides three to five-year projections of revenue, profit, and expense.

The other resources for estimating startup costs include using Upmetrics’ startup costs worksheet or calculator. These resources will help you estimate the initial investment required and determine how much capital or financing you’ll need.

Know that many of the common business expenses we discussed earlier are recurring, with some of them being one-time expenses.

Be sure to categorize them and calculate the recurring expenses on a monthly, quarterly, and annual basis. In contrast, consider expenses like incorporation fees and equipment financing one-time costs.

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Calculating Startup Costs for Your Small Business

Does your business fall under one of these categories? Excellent. We have startup cost guides for all the business categories listed below. Get a cost estimate for starting the business you plan to launch.