It is a good idea for every entrepreneur to consider the costs associated with starting their business. Financing is stressful, but estimating startup costs goes a long way to ensuring a business succeeds.
Brad Nakase, Attorney
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As a young entrepreneur, Kyle is excited to start his dream business, a baseball camp for kids. While Kyle is ready to get the business up and running, he realizes that he is going to need a lot of money upfront. Not only does he need to buy equipment, such as bats, gloves, and baseballs, but he also needs to buy insurance for his business. Then there is the cost of renting a field for practice, as well as the payroll associated with hiring employees. Kyle is quickly overwhelmed. He had no idea that a business had so many startup costs. He realizes that he will have to save more money to pay for these expenses prior to opening the baseball camp.
Creating a new small business is an exciting time for an entrepreneur, but for those who are not familiar with the process, it can also be a time of worry. There are always fears that a new venture can fail, especially when considering the financial burdens associated with getting a new business up and running.
It is normal for a new entrepreneur to be worried about financial issues. These concerns might include wondering when the business will be profitable in the long term, or how much money will be needed to get the business off the ground. This amount is known as startup costs. These are the expenses that a business owner will take on before the company can generate a profit.
It is very common for new business owners to rush into planning the business without thinking about startup costs. They fail to consider whether they will be able to afford necessary expenses involved in opening the business, as well as managing it until it reaches profitability. The unfortunate result is often that the business cannot sustain itself and fails.
It is very important for new entrepreneurs to perform careful financial planning, especially in the early stages of creating a business. Otherwise, a business owner could risk his or her company’s future from the get-go. This article will review the various types of startup costs to consider. If a business owner pays attention to these expenses and plans accordingly, then his or her business has every chance of succeeding.
A new business owner should be aware of the following twelve startup costs that can make or break a business.
Prior to starting a new business, an entrepreneur should be sure to perform market research about their prospective industry. Often, owners of startups do not observe this step, and the result is that they are unable to turn their ideas into reality.
To avoid this fate, a business owner should think about hiring a market research firm to help assess the industry and the market for a particular good or service. Naturally, one will have to pay these experts for their advice, so this cost should be factored into one’s budget.
However, their input may be well worth the cost. If a business owner does not understand an industry, then he or she may create a product or service that is either not needed or not wanted. Expertise is essential in understanding the market, and whether one will find success with customers.
Often, new business will immediately need to purchase equipment. For example, a restaurant will need to buy stoves, pans, and other kitchen supplies. A moving company will need to purchase a truck. A robotics company will need to purchase computers. Many companies, such as these examples, will need equipment from the very beginning in order to operate. Depending on the particular industry, this equipment can be very expensive. This is especially true for equipment that is required for every employee, such as computers.
The good news is that there are many types of equipment financing available for entrepreneurs. These options range from loans to lines of credit to leases.
If a business owner is worried that he or she may not be able to afford the equipment that their business requires, then they may benefit from applying for equipment financing. However, whether or not an owner considers financing, equipment costs should be factored into startup budgeting.
When an entrepreneur starts his or her business, they will need to choose a specific business entity. This entity type will determine how a business’ taxes are structured, as well as what kind of liability, if any, the business will have. For example, if a business owner chooses to incorporate their company, then it will be a separate legal entity. In this instance, the owner will need to file articles of incorporation with the state in which the company will operate.
It is a good idea to check the Small Business Association’s (SBA) state-by-state guide to figure out how much it will costs to incorporate a business in a particular state. Even if a business decides not to incorporate at this stage, it will still likely need to register and apply for state and federal licensing.
Businesses in certain industries, such as agriculture and aviation, need to have federal licensing. Service-based industries, which include hair salons and dentists, require professional licensing in order to operate legally.
The cost of registering for these licenses should be factored into startup costs, as well as any fees associated with incorporating.
Whether a business owner plans to rent or buy a physical business location, the cost of doing so can be expensive. This is especially true in major cities such as New York and Los Angeles, where real estate prices are high. Because of this major startup cost, many small business owners choose to operate their companies from home to save money.
If a business owner ends up trapped in a long-term lease, he or she could be stuck paying a lot of money for a long period of time. There are also additional costs to consider, such as utilities and other operational fees. Even if a business owner can afford a lease on a physical location, there are significant costs associated with getting the office up and running:
It is important to keep in mind that a business owner will need to pay rent prior to starting the business. So, if an entrepreneur puts down a security deposit and pays rent before starting the company, this is considered a startup cost. And it can be a significant amount.
Another option for new business owners is to invest in co-working spaces. These locations are fairly affordable and are set up and ready to use from the beginning. Often, these spaces already have furniture, Internet, printers, meeting rooms, kitchens, and other amenities.
A co-working membership app, such as Croissant, allows members to work from multiple locations on a cost-effective budget. This is a great option for a new business owner who wants a physical office space but is also hesitant to pay rent at the start of their business.
While not all businesses sell inventory, those that do will face the financial challenges associated with ordering inventory. Businesses that will face this type of startup cost include retail stores, restaurants, wholesale, and manufacturers.
If a business has too much inventory, then it risks spoilage (in the case of food) or getting trapped with items that are not selling as well as hoped (in the case of retail). However, if a business owner does not order enough inventory, then the company could lose customers who are not willing to wait for a product to be restocked.
While inventory financing does exist, there are minimum requirements that must be met. These requirements are often too difficult for new businesses to meet. Therefore, it is a good idea for a new business to make inventory a part of its startup budget. Once the business is operational, the owner can then apply for financing to help with inventory costs.
Every business faces the challenge of spreading the word about its products or services. This is especially important when a company is just starting out, because customers will be important in turning the business profitable. A business owner should therefore be sure to include marketing and advertising in any startup budgeting. A business owner might invest in any of the following with this money:
If a business does not invest money in marketing, then it won’t be able to build up sales. However, to keep advertising costs low, it is wise to take advantage of free marketing on social media. A business can create posts on Instagram, Facebook, or Twitter to attract new clients and customers. In fact, a business could use social media to advertise entirely for free until it begins generating sales. Once the business is profitable, it could then spend money on paid advertising.
Therefore, advertising startup costs will depend on the method of marketing.
In a world driven by technology, a startup’s online presence is critical to gaining customers. In fact, a brand’s website is often a client’s first interaction with a business. Therefore, it is especially important that a business have a sleek, professional website that runs smoothly.
Most customers research businesses online to review products and services before purchasing them. Still, a whopping 59% of businesses with fewer than five employees lack an online presence. A business owner can ensure that they join the other 41% by investing in services such as Squarespace and WordPress, which help small businesses establish their own websites.
To get started building a website, a business owner will need to register for a domain name. This typically comes with a yearly fee, which should be factored into startup costs. A business owner should then pick a content management system (CMS), through which the website may be built. Some CMS services are free, but most times there are monthly or yearly subscription costs.
However, if a business owner happens to be familiar with coding, he or she can build a website themselves. But if an owner does not feel comfortable with web design, it may be worth hiring a company to build the website. This would, of course, involve an additional cost. However, this cost would very likely be worth the investment.
Believe it or not, the cost of office supplies can add up very quickly. Expenses may include the following:
A business owner should not underestimate the cost of these supplies, which can make up a large portion of one’s startup budget. If a business owner cannot afford these typical office costs, then it may be a wiser move to work remotely, at least at the beginning.
For businesses that operate out of a traditional brick-and-mortar location, a common startup cost involves paying for utilities. A business owner will be responsible for paying the following bills:
When creating the budget for a business, these utilities should be factored into startup costs, as well as an ongoing business expense.
Businesses that have hired employees will need to pay them even if the company has not started generating money. Also, a business owner will need to set aside a certain portion of money to pay themselves. Payroll costs include the following expenses:
It is essential to pay employees for their work. Otherwise, a business owner could face a wage and hour lawsuit or other labor violation penalty. Therefore, this is a necessary startup expense. If a business owner cannot afford these costs, then it may be a better decision to delay hiring employees until the company generates more money.
While a business owner may be tempted to take on as many responsibilities as possible to save money, it would be a wiser decision long-term to hire professionals. These professionals may include bookkeepers, CPAs, or attorneys. Depending on the business, their services and expertise may be worth the extra expense.
For instance, an accountant can explain the different business entity structures, such as S-corps, C-corps, LLCs, and sole proprietorships. They can thus help a business owner choose the correct structure for his or her business. They may also help ensure that the company is compliant with state and federal regulations. An accountant can also help a business owner save money in deductions when tax season approaches.
Outsourcing certain tasks can help a business in the long run by encouraging efficiency and correct practice. Hiring necessary professionals is therefore worth the additional startup cost.
A business requires protection in the same way one’s health, car, and house do. There are many types of business insurance, and the right one will depend largely on the particular industry. Insurance is a wise investment, even considering the additional startup cost. It will protect the company, as well as save money and stress in the long run.
Many costs associated with creating a business will be recurring in nature. This means that a company will need to afford them on a monthly or annual basis. This type of recurring expense includes rent, utilities, and subscription services. Other startup expenses will be one-time costs, including incorporating fees or office furniture. When a business owner calculates startup costs, he or she should make sure that the business can afford to cover six months of upfront costs. This rule ensures that money does not get too tight.
It is also a good idea to hunt for bargains. Smart consumers do research before buying products or services. Finding deals is a great way to reduce some startup expenses. For instance, a business owner could choose to use software like Xerox instead of hiring a full-time bookkeeper. Also, one could choose to work from home rather than rent expensive office space. Another cost-saving practice is marketing on social media for free, rather than paying for expensive ads. These practices will help make budgeting a little easier.
Another option for new businesses is to pursue startup financing. Because few small businesses can independently afford all of their startup costs, many look for loans, lines of credit, or business credit cards. Arguably, the best practice would be to try funding startup costs oneself, then applying for a small business loan once the business is up and running. This reduces the likelihood of taking on unmanageable debt.
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