If you want to start a successful small business, you’ll need to plan and prepare yourself for the costs. Determining your small business startup costs is a vital part of starting your business.
Take the time to analyze your costs and expenses to create a long-term financial plan. Doing so may help your business grow more efficiently. Read this guide to learn about identifying and estimating your start-up expenses and how to calculate your small business start-up costs.
Calculate business startup costs before you launch
Your business start-up costs include expenses to launch and maintain your business. Creating a plan is important for creating a business. An effective business plan can help you to better manage your start-up costs, predict expenses and revenue, and acquire funds or investors.
Without a plan, it’s impossible to know exactly how much funding you require to start your business. Calculating costs early helps to ensure a successful business launch and to keep your business on track. Early planning also helps to avoid unnecessary risks such as unforeseen expenses and inefficient spending.
Calculating business costs can help with:
- Managing funds and expenses
- Estimating when you’ll generate revenue and break even
- Creating a business plan
- Requesting funding or acquiring capital
- Attracting investors with balance sheets, income statements, and business plans
Estimating profits is necessary for establishing effective business practices and cost management. Businesses use different ways to measure profitability, but net income is the most common. Net income reflects the amount of revenue that remains after subtracting expenses, debt, income streams, and taxes. You can also use marginal revenue and gross profit metrics to estimate profits.
Do a break-even analysis
The break-even analysis reflects how many sales of a product or service must be made to cover the cost of production. This can sometimes change according to the level of demand for the product or service. Investors sometimes use this calculation as it predicts when they’ll break even on an investment.
Poor credit history or cash flow can sometimes prevent small businesses from securing the loans that they need to survive. An attractive business plan and organized presentation can help convince lenders. By calculating your business startup costs, you can determine the type and scope of loan that you need. You can also explain to lenders specifically how you’ll use the loan to fund your business. This helps lenders to see that you’re organized and prepared.
Some small business owners choose to bootstrap or fund their businesses on their own, but investors can also help. Investors can provide funding to your business so that the business and investor mutually profit. Outside investors acquire shares of your business and are entitled to some profits. They may also want some control in directing the business. Royalty investors lend funds in exchange for a percentage of revenue but don’t have shares of your company. As with loans, a business plan with calculated costs can help to attract investors to your business.
Save money with tax deductions
The Internal Revenue Service (IRS) provides several ways to deduct business expenses from your income. It allows certain tax deductions for creating, launching, and setting up a business. This enables you to lower your bill. Your eligible expenses may include:
- Creating a business: market and product research, travel for site selection, surveying competition.
- Business launch expenses, such as recruiting, hiring and training employees, securing suppliers, marketing, and professional fees.
- Licenses, permits, and other fees. This may include incorporating your business, state and legal fees, director fees, and accounting fees. You may also be able to deduct expenses for conducting organizational meetings.
You can’t claim the business startup costs if the business doesn’t take off and you’re unable to start it. In the case that you cannot start your business, these expenses are considered personal expenses.
Identify your startup expenses
Most businesses are either brick and mortar stores, online stores, or service providers. Business startup costs will depend on the type of business. For example, a retail store may need display furnishings for products, while a bakery may need kitchen equipment.
Business startup costs list:
Rent or real estate: Consider whether your business needs an office or retail space or if it will operate remotely. Think about your current space needs and how that will change as your business grows. You may also consider a coworking space or if you require a dedicated space.
Equipment and supplies: This includes items such as office or retail furnishing, computers, and machinery.
Utilities: The cost of utilities may vary according to your business location and type. Some businesses may require more electricity for their operations.
Licenses, permits, and fees: Depending on the business, there may be different fee structures for businesses to legally register. Fees also vary by state. You may also need to pay for licenses and permits and their renewals. You should also consider business insurance, accounting fees, and lawyer fees.
Inventory: Account for initial inventory to launch your business and ongoing inventory costs after launch.
Employee salaries: Consider how much you’ll pay yourself and your employees. Will you hire for all of your needs, or contract out some work? Salaries will also vary according to the cost of living in your business location. Include the cost of recruiting and training.
Market research: Market research is necessary to determine current market conditions. You’ll need to gather data to inform your needs for product design, advertising, customer service, and more.
Advertising: Advertising costs will often vary according to location. Consider how much advertising you require and how you want to advertise. You can explore both digital and traditional marketing options. You may also need to pay for printed marketing materials, such as business cards, brochures, and signage.
Website: You’ll need to purchase a domain name and possibly pay for web design to launch your business. You may also require ongoing website maintenance. ZenBusiness can help you create an affordable, personalized website for your company.
Assets and expenses
These costs can be categorized as either expenses or assets. Categorizing your costs matters when it’s time to calculate your startup costs, as you may be able to deduct expenses from your taxes. Assets are not tax-deductible.
Assets: Resources that your business owns and which retain value after a year or more of use. This may include fixtures, furnishings, and real estate.
Expenses: Resources that your business spends money on and uses, but which have no real ownership value. This may include legal fees, employee salaries, and rent.
Estimate how much your expenses will cost
To accurately estimate your business startup costs, you’ll need to research. Some expenses have clearly set costs, such as permits and licenses.
Other costs may vary, like employee salaries or ongoing inventory. You can search for this information online. Speak to mentors to compare your estimated costs with similar companies. Mentors can assist in determining which expenses are necessary for launch and which can be invested in later when your business is better established.
Contact vendors and service providers for quotes. Compare these with industry averages. Consider as well that the time of year may affect certain costs.
For some expenses, it’s impossible to know exactly how much they’ll cost. Make an educated guess based on your research, and then pad this estimate to account for unexpectedly higher costs.
Add up your expenses for a full financial picture
Once you’ve identified and estimated all of your costs, organize them into one-time and recurring categories. Categorizing your costs helps to forecast how much funding you’ll need at specific times. It also helps to avoid unexpected costs.
One-time expenses are items that you pay for only once. Many of these expenses may be tax-deductible. They include:
- Major equipment like cash registers, computers, machinery, or vehicles
- Furnishing such as desks and retail shelving
- Down payments on real estate
- Logo and brand design
- Paying for permits, licenses, and fees (though some of these may need to be renewed periodically)
- Marketing materials including signage, brochures, and business cards
- Website domain and design services
These are costs incurred on a regular basis. They may be paid weekly, monthly, yearly, or otherwise. They include:
- Employee salaries
- Utility bills
- Operations such as product shipping and packaging
- Ongoing inventory
- Insurance payments
- Marketing costs
- Loan payments
- Legal services
- Accounting services
- Website maintenance
Calculate your revenue and funding
To calculate your revenue, take a few factors into account. Consider the total market, potential market share, and current market conditions. Create a customer persona that indicates how often you may be able to sell goods or services. Use this persona to also determine what price you can sell at. Keep these numbers conservative so that you don’t overestimate your revenue.
You may also consider other funding options. These include:
Use start-up cost calculations to get start-up funding
Now that you’ve established your expenses, assets, and revenue, you can create a start-up cost calculator spreadsheet. This is essentially a business start-up worksheet. It can be used on an ongoing basis to keep track of your costs as your business changes and grows. You can also use it to create a formal report for potential funding. Investors and lenders compare the expected costs to projected revenue and assess the profitability of your business.
Calculate your costs in a spreadsheet
This spreadsheet should be easy to read and understand. Account for at least one year of monthly expenses and up to five years. A five-year forecast won’t necessarily be accurate as your business will likely face unexpected growths and challenges. It does, however, provide a useful sense of business direction.
When calculating expenses, overestimate slightly to accommodate for variability. Your business may also grow unexpectedly such that you may need to cover additional expenses, such as marketing, inventory, or salaries. Likewise, make sure to underestimate sales as you’re unlikely to experience best-case sales each day, especially during the startup phase.
To calculate your startup costs, you can either use business software or create a spreadsheet with at least 12 months. For each month, include estimated sales, costs, and expenses. Then, subtract costs and expenses from the sales of each month. The leftover amount is your revenue.
Because you have many one-time costs, it’s unlikely that you’ll have any revenue in the initial launch of your business. This spreadsheet, however, should be able to forecast when your business will break even and start generating revenue. In the meantime, your report should determine how much funding you may need from investments, loans, credit, or savings. Calculating these business start-up costs can position your business to succeed.
- How do I create a small business idea?
If you don’t already have an idea of a service or product to sell, consider the things that you wish you had or could improve on. Brainstorm ideas by browsing online, considering your own interests, and asking for input from people around you.
- How do I create a startup plan?
Make sure to refine your business idea and objective. Then, identify your market and research accordingly. Identify milestones and goals, and create a budget to meet them. Assess your finances and whether you’ll require additional funding from investors or loans.
- What is the easiest business to plan?
Businesses that provide services rather than goods are usually easier to start. You can avoid many expensive costs, as you may not need a physical business space or inventory. If you’re operating alone, you don’t need to pay employee salaries.
- What are the most common types of small businesses?
Real estate services, food services, web design, and personal training are all common types of small businesses. Many people have small businesses on the side, like pet sitting or an online store.