How Much Does It Cost To Start Your Own Business – What will it cost to start a business? It’s hard to know for sure, but it’s important to start planning as early as possible to avoid unexpected expenses.
Starting a successful business requires preparation. And while you may not know exactly what those expenses will be, you can and should start researching and estimating how much it will cost to start a business.
How Much Does It Cost To Start Your Own Business
Start-up costs are expenses incurred before starting a business. These are the bills and expenses that you will need to cover before starting your business. While every business will have specific start-up costs to consider, your business will generally fall under either a brick-and-mortar, online, or service-based organization.
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Just like your business plan, estimating startup costs is part of building your business plan. Even a rough estimate can help you avoid unnecessary risks and stay on track during the more volatile months.
Still not convinced you should review your startup costs? Here are a few more reasons why you should calculate your startup costs.
Every single industry and business requires significantly different expenses, which means there is no simple formula for calculating start-up costs. But that doesn’t mean you can’t make an educated estimate that accurately reflects your business needs.
For example, a SaaS business may need to charge additional online tools or server expenses to keep their site up and running. But a clothing store, brick-and-mortar or online, will have to factor in physical inventory and shipping costs.
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Many people underestimate the start-up costs and start their business haphazardly, without planning. This may work in the short term, but is usually much harder to maintain. Managing start-up costs is almost impossible until you calculate them accurately, and customers are often wary of brand new businesses with makeshift logistics.
Your financial plan is an overview of your current finances and growth projections. Having realistic start-up costs, even if they are just estimates, is one of the key elements of building a viable financial plan. Understanding what it will take to start a business can help you:
If you want to use your financial plan successfully, you will need to constantly review it throughout the life of your business. These early launch estimates will give you a baseline to refer to during these inspections. After a few months of operation, you will know if your estimates are realistic or if any adjustments need to be made.
Investors and lenders want to understand the plan you have in place for your business. You must be prepared to answer questions about your business model, revenue sources, growth projections, and initial startup costs. They need to see that your business is viable and that you have thoroughly researched what it will take to launch, operate and grow.
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In this case, it is essential to have a realistic initial cost. Being able to show how you think expenses will change or stay the same over time will give them a better idea of how you intend to run your business.
Similar to creating a business plan or forecasting initial sales, it’s a mix of market research, testing, and educated guesswork. It’s up to you to adjust based on actual results over time.
For a starting point, look at your competitors and industry standards for specific spend categories. You don’t want to directly copy the expenses you find, but make sure your estimates make sense based on current market factors. You may find that you have a competitive cost advantage based on a healthy relationship with a supplier or recurring expenses that you can avoid based on your business model.
It might still leave you wondering, how do I actually estimate the realistic start-up costs of my business? Start by creating these three simple lists.
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These are expenses or start-up costs that occur before you launch and start bringing in any revenue. These should be divided into one-time and ongoing expenses. By separating them in this way, you can make a more accurate estimate of what it will take to get your business off the ground. Here are some common expenses to consider in both categories:
This makeup is just a handful of potential costs you’ll need to consider. Some will remain fixed, others will function as variable costs, and some may shift between them over time. By having them mapped out like this from the start, you’ll be better able to track your spending and identify any natural cost-cutting opportunities over time.
These are costs associated with the purchase of long-term assets for the purpose of starting a business. While cash in the bank is the most basic startup asset (and we’ll talk more about that later), there are a few other common assets you may need to invest in:
Now there is a reason why you should separate costs into assets and expenses. Expenses are deductible from income, so they reduce taxable income. On the other hand, assets are not deductible from income.
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By separating the two, you potentially save money on taxes. In addition, by accurately accounting for expenses, you can avoid overstating your assets on the balance sheet. While it’s usually better to have more assets, assets that are unnecessary or unsubstantiated will only bloat your books and can make them inaccurate.
Listing them separately is good business start-up practice and leads to the final part to consider when determining start-up costs.
Cash requirements are an estimate of how much cash your startup needs to have in its checking account when it starts. In general, your cash balance at the start date is the money you’ve raised as investments or loans, minus the cash you spend on expenses and assets.
This is the last piece of the puzzle you’ll need to get started. Keep an eye on cash flow projections as you build your plan. If your cash balance drops below zero, you need to increase your financing or reduce your expenses.
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Many entrepreneurs decide they want to raise more money than they need in order to have money left over for contingencies. While it makes sense when you can do it, it’s hard to explain to investors. Outside investors don’t want to give you more money than you need because it’s their money.
You may meet with experts who recommend covering costs ranging from six months to a year using seed cash. It’s nice in concept and would be great for peace of mind, but it’s rarely practical. And that interferes with your estimates and dilutes their value.
To get a better estimate of what you really need in your starting cash balance, calculate the deficit expenses that are likely to occur during the first few months of business. From there, estimate how much cash you’ll need going forward until you break even months and even years after opening.
Now that you have your potential assets, expenses, and startup cash, it’s time to put them together to estimate your total startup costs. There are two potential methods you can use to develop these estimates.
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The more traditional one, which I call the worksheet method, involves creating separate worksheets for start-up costs and start-up financing.
The more innovative version we use in our LivePlan software simplifies this by using ongoing estimates of expenses, asset purchases and financing to manage cash flow as a continuous process. Either option is valid, so let’s take a look at how to do each method.
The traditional method uses a startup worksheet, as shown in the figure below, to plan seed funding. Here is an example for a bicycle retail store. It includes lists of startup costs in the upper left corner, startup assets in the lower left corner, and startup financing on the right.
Total start-up costs in this example are $124,650, the sum of expenses ($3,150) and assets ($121,500) required before lunch. The financing plan on the right shows that the owner plans to invest $25,000 of her own money and $99,650 in loans. Borrowings include a long-term loan of $70,000 and other borrowings including a business loan of $17,650, a note of $2,000, and other current debt (probably credit card debt) of $10,000.
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Notice the balance here. One side shows the initial cost and the other shows where the money will come from.
Also note that assets include $35,000 in cash and in a bank account. This estimate in this example comes from the example above, which calculates an initial cash need of $25,708. Instead, the entrepreneur estimates $35,000 to have a reserve.
Remember that the worksheet contains information about what happens before it starts. Excludes ongoing sales, costs, expenses, assets and post-launch financing.
This example worksheet shows estimated expenses of $3,150 incurred prior to launch. That’s your initial loss at the start, which means these expenses can later be deducted from income for tax purposes. This loss may look bad on the surface, but it is quite normal for startups. In fact, it’s financially beneficial, as the expense to be deducted from future taxes lowers your tax bills.
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LivePlan suggests something different and probably more
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