Every business owner needs some startup funds to open a new business. The amount necessary depends on the specific type of business, the kind of resources that will be used and where the business will be located. If you are thinking about starting a business, you need to consider all of these elements as well as other factors to estimate your startup costs.
In this article, we discuss the steps to take to find out how much money you need to start your business and the different types of startup costs that you'll need to consider.
Why is it important to determine startup cost?
Starting a successful business requires a great deal of preparation. To have your startup business be profitable in the first one to two years, you must set a goal, create a production schedule, estimate a budget and determine startup costs.
A business cannot operate without adequate finances, so every startup must have a certain amount of funds available before it can function. If business owners have an accurate estimate of their startup costs before they begin a new venture, they increase the success and longevity of their business.
Most successful business owners would suggest stockpiling at least six months' worth of operating funds before opening for business. Ideally, you should be able to successfully run the business for a minimum of six months without any profits from customers or clients. This gives you a financial safety net you can fall back on if the business is initially slower than you anticipated.
Related: 7 Ways To Market a Small Business
Overview of startup costs
All the startup costs associated with starting a business fall under two categories: expenses and assets. Expenses are repeated costs that you must pay regularly, like rent, insurance bills and employee paychecks. Assets are things that you purchase once and consider necessary investments, like office equipment, vehicles or property. Here is an overview of the expenses and assets that you may need to pay for when starting a business:
- Permits or licenses
- Office space
- Office supplies
Most businesses require some sort of specialized equipment. For a marketing agency, this would include printers, monitors and electronic tablets. Meanwhile, a dentist's office would require examination chairs, lights, drills and an X-ray machine. Typically, this type of purchase is a one-time expense that only has to be repeated if the equipment breaks or becomes outdated.
Depending on the nature of your business, you may be able to minimize your startup costs by buying second-hand or wholesale equipment. The costs of equipment vary by business and can be anywhere between $10,000 and $100,000.
Permits or licenses
For most businesses, you will need to procure some sort of permit or license from the federal government before you can open your doors. You will also need to pay the necessary fee to register your business's legal name and trademark. If you wish to register as an LLC, you will also need to pay incorporation costs and file the necessary articles with your state. Estimates for federal costs vary by state but usually do not exceed $300.
Many businesses begin with the business owner working from within their own or in a shared office space. However, as the business grows and more employees become necessary, the business owner will need to rent or buy their own office space. Property costs will vary significantly depending on location and the business's specific requirements. Small business owners are typically encouraged to budget between $100 and $1,000 per employee per month.
One of your potentially-expensive business expenses is office supplies. This includes ink for the printer, computers for your employees and coffee for the staff room. Some office supplies like chairs, a microwave or a WiFi router you will only need to buy once. Others like copy paper, disposable tools and cleaning supplies will need to be replaced as they run out. The cost of your supplies will vary by industry but may be able to stay within 10% of your overall budget.
In addition to providing a workspace for your employees, you will also have to pay them for their work. This includes benefits, like insurance and vacation days. As your business grows, you will likely need to begin hiring more employees, so your payroll budget may need to be regularly adjusted.
Consult competitive job listings and use services like Indeed's salary tool to determine how much you will need to budget for each employees' paycheck. The specific amount will vary depending on your employee's skill level and your geographic location.
If your business supplies a product, you will need to make room in your budget for purchasing inventory. This includes all the resources and materials you need to manufacture, package and ship your product. You will need to research the current market and your competitors to determine how much inventory you need to have available at any given time. The cost of your inventory depends on the nature of your product but should account for 17-25% of your budget.
Marketing is one of the most effective ways to bring in customers and increase your business's profits. Marketing can take many forms including flyers, commercials and internet advertisements. Some of these tactics can be expensive, so you may want to start out by using free options like social media platforms to spread the word about your new business.
A regular posting schedule, creative content and meaningful interactions with your followers will help you grow your online audience effectively.
Read more: Grow Your Business
In the modern market, a well-crafted website is one of the most important assets for a business owner. Many of your customers and clients are likely to search for your business online before they commit to buying your product or service. There are many services available that you can use to create a free website.
However, most quality website hosting services also offer a premium plan that requires a monthly or yearly payment. Providers like Squarespace and Wix average around $40 a month for premium service.
Depending on the nature of your business, you may need to purchase a business insurance policy. This may involve liability insurance, property insurance and worker's compensation. Insurance costs for United States businesses average around $1,200 per year.
Every business must pay income tax to the federal government. It is difficult to predict the exact amount when you do not yet have an accurate estimate of your yearly revenue, so you may want to invest in hiring a certified public accountant to help you file your taxes. This added expense may be well worth the money if the CPA can save you money when filing.
In addition to a CPA, you may also want to invest in hiring an expert to help you start your business on a solid foundation. Possibilities include marketing consultants, information technology technicians and attorneys. Typically, you can pay these types of professionals an hourly rate to meet with you and discuss the specific needs of your business.
They will most likely be able to offer valuable insight into your processes that can help save you money in the future. Some established companies pay between $1,000 and $5,000 per year for professional consultation.
Read more: Learn About Being a Business Consultant
How to determine how much money you need to start a business
Here are some specific steps you can take to determine how much money you will need to start your business:
1. Decide on goals and priorities
Before you start spending any money on a business idea, you will need to set specific goals for what you want the business to accomplish. Set objectives for profits, growth and other forms of success.
After setting goals, consider your personal and professional priorities. Decide how much energy and time this project will require and make sure you can make the necessary commitments. Once you have these elements in order, you will be able to make a realistic and manageable startup budget.
2. Write a business plan
After you understand your goals for the business, you will need a plan for how to reach them. Set aside time to write a thorough business plan. This business plan will help you organize your thoughts about the business and collect the information you need to create a startup budget. A good business plan includes:
- Overview of current supply and demand
- Outline of how your business will be managed
- List of necessary supplies and vendors
- Estimated weekly, monthly and yearly operating budgets
3. Look into financing options
Many business owners take advantage of outside financing when starting a business. This includes taking out a small business loan, borrowing money from a family member or friend or applying for government grants.
Most lenders will want to see a detailed business plan and cost estimate before agreeing to finance your business, so make sure to have the necessary documents prepared in advance. Once you are aware of all your options, you will be able to calculate how much of your startup funds will still need to come from your own savings.
4. Be adaptable
Business ventures seldom go exactly according to plan. You will likely encounter some unexpected costs within the first year or two of starting your new business. This may take the form of equipment failure, the loss of an employee or a manufacturing delay. If you have a healthy savings account and are willing to adjust your budget to accommodate setbacks, you will be able to overcome any challenges without taking a significant personal loss.