At the start of every small business’ journey, regardless of industry, entrepreneurs can expect to incur startup expenses. As the adage goes, “You have to spend money to make money.” However, the amount of money a startup can expect to spend up front will vary greatly depending on the type of business it is looking to establish. Here’s how to determine how much money you’ll spend to start a business. Start Small As you consider your business idea, it’s important to understand where this idea could ultimately lead while staying realistic about what you can and can’t afford right off the bat. Set a firm budget and consider alternatives to pricey equipment and marketing to ensure you stay within your means. For example, purchase refurbished equipment until you can upgrade to better technology, limit the number of software you use, and heavily market your business using low-cost platforms like social media and email campaigns. By identifying areas where you can limit spending and automate processes using technology, you can cut costs, potentially reduce the need for additional employees, and run your business with fewer resources. Calculate Your Startup Costs Before You Launch Your Business Starting a business requires a firm understanding of—and budget for—all the potential costs you may incur before its launch. Consider the following steps. 1. Understand the Types of Costs You’ll Have Startup expenses new business owners can expect to incur include costs for: Office space Employee salaries Insurance Shipping Equipment (such as technology or appliances) Supplies Utilities Marketing Licenses Permits Legal services (including a lawyer and an accountant) Market research Website development costs Inventory 2. Identify Startup Expenses Depending on the type of business you are looking to establish, the scope of your startup expenses will vary, as each company’s needs are different. For example, a single entrepreneur running an online service-based business will likely be able to save on staffing costs, since there is minimal overhead. Alternatively, a new restaurant requiring a physical storefront and a team to operate will incur more staffing expenses, but they may be able to cut costs elsewhere. 3. Estimate How Much Your Expenses Will Cost Estimating your total expenses, both one-time and monthly, will require extensive research and networking. Some costs will be easy to determine—such as permits, technology, and software costs, which may have prices listed online. Others—such as employee salaries, insurance, inventory, and office space rental—will require you to contact service providers and vendors directly to determine the exact figure. After all your estimated costs have been determined, add all of these expenses together to get a rough idea of what your business' financial responsibility will be. 5 Commonly Overlooked Startup Costs Starting a business comes with unique expenses. Starting a construction company requires an investment in costly equipment. You can’t open a restaurant without a space or commercial kitchen appliances. Tech companies require software development and coders. In addition to these “known” expenses, there are additional costs that are commonly overlooked by startup founders. To avoid surprises, we’ve put together a list of commonly overlooked costs that every startup founder should consider. 1. Transaction Fees Credit card transaction fees: 1.7%–3.5% per transaction Payment processor fees: 2.87%–4.35% per transaction (for businesses that do between $10,000 and $250,000 each year) Technology has made it easier to process sales and payroll, but it’s also added to the cost of both. For every credit card transaction that you process, you will be charged a credit card transaction fee by the credit card company and a payment processing fee by your payment processor. Those combined payments could total as little as 4.54%—this would equal $454 for an annual credit card revenue of $10,000 or $11,350 for an annual credit card revenue of $250,000. Or it could be as much as 7.85%, equaling $785 for an annual credit card revenue of $10,000 or $19,625 for an annual credit card revenue of $250,000. These estimates are based on average ranges to give you an idea of what transaction fees may look like. It’s important to note that fees can vary, and these numbers are not a set predictor of what your transaction fees will be. Payment processing fees, especially, can vary. Many end up being higher than the original quotes. So when you’re selecting a payment processing company, make sure to do your research to avoid surprise fees later. 2. Payroll Fees Payroll processing fees: 2%–10% of total payroll Startups, like all businesses, have to contend with payroll fees. If your company grows past solo entrepreneur status, you will want to use a professional employer organization (PEO). PEOs handle a number of important duties, including processing payroll, calculating taxes (state, federal, and employment), and recording and calculating payroll deductions. In exchange for taking these complicated tasks off your hands, PEOs charge a processing fee that typically ranges between 2% and 10% of total payroll costs. 3. Bookkeeping Software Potential range: $5 to $60 per month Bookkeeping software is an essential tool to help businesses keep track of all their accounting needs, such as basic invoicing, reporting, and bill tracking. The software your business requires will depend on factors including how many employees are on your payroll and whether or not you conduct business internationally. Extra features, such as a supplemental mobile app or the ability to use multiple currencies, sometimes come with a premium price tag that may not be viable for startups. However, scaled-back options are available for businesses looking for less. 4. Hiring a Stellar Team Hiring a new employee: $4,683 If you want to take your business to the next level, you need a trustworthy team you can trust to get it done. While many businesses budget for the cost of additional employee salaries, the cost of hiring can take startups by surprise. According to the Society for Human Resource Management, hiring a new employee costs nearly $4,700. As you plan your headcount for 2023 and beyond, avoid surprises by allowing for potential hiring expenses in your new-hire budget. 5. Business Insurance Potential range: $500–$3,000 per year Business insurance protects a business owner from potential costs of property damage and liability claims. In addition to making sound financial sense, liability insurance may be essential for a business to acquire customers, depending on your industry. It’s difficult to provide an accurate estimate of your business insurance costs, because of the variance in pricing. Factors like your business’ classification, type of goods and services sold, salary and employee totals, and business risks all contribute to business insurance pricing. According to Forbes, small business insurance will generally run you anywhere from $14 to $340 per month, depending on the number and types of policies you purchase. These may include general liability, business interruption, cybersecurity, and commercial property insurance, among others. These numbers can give you a starting idea of what to expect, though if you’re in a high-risk industry, those numbers can be higher. The Bottom Line For many prospective entrepreneurs, the costs of opening a business can feel like a major barrier to overcome. Hidden and overlooked expenses can be overwhelming and unexpected if you aren’t prepared for them. However, by understanding all the financial obligations your business will be responsible for, you can create a reasonable and manageable company budget that brings your idea to life and sets it up for success.