How much does it cost to start a business? This is one of the most frequently asked questions by entrepreneurs. The answer, unfortunately, is not a simple one. And honestly, it is way more than what they show on TV shows like Shark Tank.
Business startup costs depend on various factors such as the type of business, its location, industry, size, etc.
It can be as low as a couple of hundred dollars or even a few thousand. But it can also be enough to make you bankrupt if you’re not careful.
This is why it is crucial to understand all the costs incurred while starting a business, from research and development to marketing and advertising. Only then can you create a realistic budget and avoid financial roadblocks down the line.
To help you out, we’ve put together this comprehensive guide on business startup costs. This guide will cover everything you need to know about the different costs involved in starting a business, how to calculate them, and, most importantly, how to reduce them.
What Are Business Startup Costs?
Startup costs are the funds necessary to begin operating your business. These usually come in the form of one-time expenses like purchasing inventory or equipment, and ongoing costs like rent or salaries.
Some startup costs are obvious—you’re not going to open a brick-and-mortar store without first paying for the space. But others can be more difficult to anticipate.
Generally, startup costs can be classified into one-time and ongoing expenses.
One-time startup costs are exactly what they sound like—expenses you will only incur once during the life of your business. These could include costs like:
- Investigatory costs ($100 – $10,000+): These involve costs related to your initial research, such as market analysis or feasibility studies. These research expenses can be as less as a few hundred dollars if you’re able to do it yourself, or they could be in the tens of thousands if you hire a consultancy firm.
- Registering your business ($145 – $400): The cost of registering your business will vary depending on the type of business you are starting and the state in which you are registering. Usually, it will cost a few hundred dollars ($145) to register your business yourself. However, the process can be a bit tiresome, so people tend to use online services (around $299 + state filing fees) that will do it for them.
- Licenses and permits ($0 – $3,000): Depending on the nature of your business, you may need to obtain certain licenses or permits to operate legally. These could include things like a business license, a food handler’s permit, or a liquor license. The cost of these licenses and permits will vary depending on the type of business you are starting and the state in which you are operating. Moreover, you may even have to pay professionals to help you identify and research which licenses and permits you need to obtain.
- Domain name and website ($0 – $2,000): You will need to purchase a domain name and build a website to have an online presence. The cost of a domain name is usually around $10 per year, while the cost of web hosting and website design can vary from a few hundred to a few thousand dollars, depending on your needs. If you decide to build your own website, you could save on costs using WordPress or other user-friendly CMS.
- Professional fees ($0 – $5,000): You may also need to hire professionals such as an accountant, lawyers, or consultants. Make sure to research the going rates for these services in your area to budget accordingly.
- Equipment and supplies ($10,000 – $100,000): If you’re starting a physical business, you’ll need to purchase equipment and supplies. The costs for the same can range from a few thousand dollars for small pieces like a printer to hundreds of thousands of dollars for larger pieces like machinery.
Ongoing expenses are those costs that you will continue to incur regularly after your business is up and running. These costs include fixed costs which stay the same each month, and variable costs which fluctuate based on usage.
Fixed costs are those expenses that stay the same each month and don’t fluctuate with usage. These costs include:
- Office space ($300 – $1,000 per month per employee): Office space can be one of your biggest fixed costs. The rent or lease depends on the location, team size, and amenities you need. If you’re just starting out, you may be able to get by with a coworking space or working from home. As your business grows, you’ll need more space and will eventually have to pay for your own office.
- Utilities ($100 – $500 per month): Utilities are the costs of running your office, like electricity, water, and trash. These costs will be higher if you have a large office space or if your business uses a lot of power (like if you have a manufacturing facility).
- Payroll (15% – 30% of budget): Employees will be one of your biggest ongoing expenses. In addition to their salaries, you’ll also need to factor in payroll taxes, benefits, and other associated costs like workers’ compensation insurance.
- Insurance ($500 – $2,000 per year): Insurance is essential for any business. You’ll need to decide what kind of insurance you need based on the risks associated with your business. For example, you’ll need property insurance if you have a lot of inventory. If you have employees, you’ll need liability insurance.
- Professional Services ($500 – $5,000 per year): You may also hire consultants or other professionals to help you with specific aspects of your business. For example, you may hire an accountant to help you with your taxes or a lawyer to help you with contracts. Even though their payments aren’t counted as payroll, these professional services still need to be factored into your fixed startup costs.
- Technological Expenses ($500- $10,000): If you plan on selling products or services online, you’ll need to factor in the costs of maintaining a website. This can include hosting fees, domain registration, site design, and content creation. Besides the website, you may also need to invest in a good CRM (customer relationship management) platform and office productivity tools like Google Suite or Microsoft Office. You may also need an email marketing service like MailChimp to stay in touch with your customers.
- Loan repayments (0 – $1000): If you’re taking out a loan to finance your startup, you’ll need to make repayments on that loan. The amount you’ll need to repay will depend on the terms of your loan, but you should factor in at least a few hundred dollars per month for repayment.
Variable costs are those that fluctuate with your sales. They will increase as your business grows and you sell more products or services. They can also decrease if you sell less than you anticipated.
- Product And Inventory Cost (20%-60% of total pro): Product cost (or cost of goods sold) is the direct cost associated with producing the products you sell. This includes materials, packaging, labour, warehousing, and shipping costs. You’ll also need to factor in the inventory cost if you’re selling physical products. For services, your COGS will be the cost of any materials used to deliver the service. For SAAS offerings, you’ll need to account for the cost of developing and maintaining your software.
- Marketing And Advertising (5% – 30% of budget): Getting the word out about your business is essential to its success, but it can also be one of the most expensive startup costs. You’ll need to factor in the cost of things like market research, branding, website development, and advertising.
- Customer Service (5% – 10% of budget): Customer service is important for any business, but it’s especially important for startups. You’ll need to factor in the cost of providing customer support, whether that’s through phone, email or live chat.
- Returns (2% – 4% of budget): Most businesses will have some returns, whether because of damaged goods or because customers change their minds. You’ll need to factor in the cost of returning merchandise as well as the cost of shipping it back to you.
- General And Administrative Costs (2% – 5% of budget): A lot of administrative costs go into starting a business, from paper and ink to office supplies and furniture. These small expenses can add up, so it’s important to factor them into your budget.
- Outsourcing Costs (0 – $5,000): Many businesses outsource tasks like bookkeeping or customer service. These costs can be low if you hire freelancers from marketplaces like Fiverr or Upwork or more expensive if you hire a full-time virtual assistant.
- Taxes: Depending on the type of business you start, you may be responsible for paying different taxes. For example, if you’re starting a brick-and-mortar business, you may have to pay property taxes on the space you lease or own. Besides specific taxes, there are also sales taxes and self-employment taxes to consider.
How To Calculate Total Business Startup Costs?
Just knowing what all costs are usually incurred while starting a business is not enough. As an entrepreneur, you should also know how to calculate your total business startup cost. This will give you a clear idea of how much money you need to get your business off the ground and how much money to ask in that investment round.
To calculate your business startup cost, you can use the following formula:
Total Business Startup Costs = Business formation costs + initial inventory costs + marketing costs + operating expenses.
But these costs will be different for different businesses. To know what all costs apply to your business, follow this process:
Asses Business Formation Costs
The first step is to assess the costs associated with the business formation. This can include the cost of incorporating your business, obtaining any licenses or permits, and hiring a lawyer or accountant to help get your business off the ground.
They can also help you determine what type of business entity is right for you and how to set up your business to minimize taxes.
Calculate Inventory Costs
The cost of goods is the cost of manufacturing your product or service. This includes the cost of raw materials, labour, and shipping.
To calculate the cost of goods, you can use the following formula:
Cost of Goods = (Raw Materials + Direct Labour + Overhead) / Number of Units Produced
Overhead includes other product-related costs like packaging, shipping, and storage.
Calculate The Operating Costs
Operating costs are the costs associated with running your business on a day-to-day basis. This includes costs like rent, utilities, payroll, taxes, insurance, and office supplies.
To calculate your operating costs, you can use the following formula:
Operating Cost = Monthly Rent + Utilities + Payroll + Taxes + Insurance + Office Supplies
Rent and utilities should be easy to estimate. To calculate payroll, multiply the number of employees by the average salary. For taxes, use the tax rate for your business. And for insurance, use the average cost of business insurance in your area.
To calculate your office supplies, consider how much you spend on supplies each month. This can include things like paper, ink, toner, and other office necessities.
Calculate The Marketing Costs
Marketing costs involve costs associated with promoting your business and getting customers through advertising, public relations, and other marketing initiatives.
You’ll need a detailed marketing plan outlining your marketing strategy and associated costs to calculate your marketing costs. Once you have that, calculate monthly advertising costs, the cost of any promotional materials, and your monthly public relations fees.
Total Your Estimated Business Startup Costs
Now that you’ve calculated all of the individual components of your business startup costs, you can add them all together for a grand total. This is your estimated total cost to get your business up and running.
Optional: Asses Your Working Captial Requirements
Working capital is a financial metric that measures a company’s ability to pay its short-term obligations. In other words, it is the money that a business has available to fund its day-to-day operations.
There are a couple of different ways to calculate working capital. The most common method is subtracting a company’s current liabilities from its current assets. This will give you the total amount of money that the business has available to pay its short-term obligations.
You might want to add a cushion while calculating your startup costs to make sure you have enough money to cover unexpected expenses that might come up.
Optional: Calculate Your Runway
Startup runway is the amount of time you have to get your business up and running before you run out of money. This is an important metric for startups because it can help you determine how much money you need to raise and when you need to start generating revenue.
How Can You Reduce Your Business Startup Costs?
Now that you have a good understanding of the typical costs associated with starting a business, you might be wondering how you can reduce your own startup costs. Here are a few tips:
- Do your research and plan ahead. This will help you avoid making costly mistakes.
- Consider outsourcing or using freelancers instead of hiring full-time employees. This will save you on salary and benefits costs.
- Look for ways to save on office space, such as working from home or coworking space.
- Take advantage of free or low-cost marketing channels, such as social media and PR.
- Try replacing human labour with technology where possible. For example, using an AI writer like Jasper instead of hiring a content writer for your business.
- Always look for more than one vendor when making big purchases. This will allow you to compare prices and get the best deal.
- Apply for an accelerator program. It can provide you with funding, mentorship, and access to resources like office space for free.
- Find an experienced business mentor who can offer advice and guidance.
Frequently Asked Questions
Here are some common questions entrepreneurs have about startup costs:
The cost of starting a business varies greatly depending on the type of business you want to launch. A small home-based business may cost just a few hundred dollars, while a more complex business could cost tens of thousands.
The most common startup costs include operating costs like rent, utilities, and insurance; business formation costs like filing fees and legal expenses; and initial inventory or product development costs.
There are several ways to reduce your startup costs. You can look for free or low-cost business formation services, negotiate with vendors for better rates, or find creative ways to reduce your inventory costs.
No matter what type of business you want to start, it’s important to calculate your startup costs carefully. By understanding all of the costs associated with starting your business, you can develop a realistic budget and create a plan for reducing those costs.
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A startup consultant, digital marketer, traveller, and philomath. Aashish has worked with over 20 startups and successfully helped them ideate, raise money, and succeed. When not working, he can be found hiking, camping, and stargazing.
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Author: Aashish Pahwa