Startup Costs: Guide To Understanding Business Expenses

 

One of the main reasons small businesses fail is lack of capital. Entrepreneurs are excited about getting their venture started, and sometimes can overlook essential business startup costs in their haste to get going. As a result, they often don’t start with enough capital, which causes them to run out of money before they can get their businesses off the ground. But it doesn’t have to be that way.

Here’s what you need to know about startup costs for a business and how to set yourself up for success.

Step one: Create a Business Plan

 

If you were going to build a house, you wouldn’t try to do it without a blueprint. You’d need to know how to pour the foundation, erect the walls, where to put the bedrooms and the kitchen, and what type of roof to install.

It’s the same with a business. 

Starting a new business requires a well-thought-out plan. It provides the details of how you intend to build your business and make a profit. The basic elements of a business plan are as follows:

• Executive summary – The executive summary briefly describes the business concept, the financial requirements, important financial benchmarks (such as sales, cash flow, and profits), the legal structure, and the owners and key personnel.
• Business description – What products or services do you intend to sell? How will your products be different from your competitors? 
• Market analysis – Who will you sell your products or services to, and why will they buy from you?
• Competitor analysis – Who are your competitors, and what are their strengths and weaknesses? What strategies will you use to gain an advantage?
• Marketing plan – What is the unique competitive advantage you intend to create for your business, and how will you let the world know about it? What media will you use?
• Operating plan – What are the action steps you and your employees will take to implement the business concept? 
• Financial projections – How much revenue do you expect to bring in? What are the expenses? How much profit will you make? How will the business be funded?

A business plan provides the answers to these questions, and gives you a guideline about how much money you’re going to spend getting your business started, how and when the cash will come in, and how much profit you intend to make. 

Every business needs a certain amount of money to get started—some need more than others. Brick-and-mortar stores take more capital than an online business or a service-based operation. One isn’t better than than the other—they just have different needs for startup capital and have different kinds of startup costs.

Step two: Understand Startup Expenses

Most startup expenses typically fall into the categories listed below:

Market Research Estimated Cost $-$$

 Before you start any business, you must do the initial research to identify the types and quantity of potential customers who might want your products and services, and do some digging into the number and strength of your competitors. An owner could save money and do the research themselves or hire a market research firm.

 

Licenses and Permits 

Estimated Cost $-$$

Most businesses, regardless of the type, will need certain licenses and permits, depending on local and state regulations. Fees will vary by location.

 

Insurance 

Estimated Cost $-$$

 Depending on the type of business, you’ll need insurance to protect your business assets, cover your employees, and provide coverage for liability lawsuits from customers or other outside parties. A construction company with employees operating heavy equipment will need more insurance coverage than a sole proprietor working out of a home office.

 

Office or Warehouse Space 

Estimated Cost $100 to $1,000/monthly per employee

 If you’re renting office and warehouse space, you’ll need money for deposits and  leasehold improvements.

 

Equipment and Supplies 

Estimated Cost $$-$$$$

Almost every business needs some type of equipment. A construction company may need heavy earth-moving equipment, and a restaurant will need ovens, furniture, and dishware. And every business will likely have technology and electronic needs, like computers with software and networking capability for employees. 

 

Technology 

Estimated Cost $-$$

—- Every business needs an online presence, whether it be an online marketplace selling goods (like clothing retailers, bake shops, or beauty suppliers) or a professional services firm highlighting its offering (think lawyers, accountants, dental offices). Costs for a website can range from just a few hundred dollars to several thousand.

 

Utilities 

Estimated Cost $-$$

—- If you have a physical location, you’ll have to pay for utilities, such as electricity and gas. On the other hand, if you’re starting your business from home, utility costs will likely be much less.

 

Advertising and promotion 

Estimated Costs $-$$

—- Somehow, you have to get the word out that you have products and services to offer to customers. Your business plan should detail how you intend to promote your business and the costs involved. You’ll probably have to do more than put a few ads in the local newspaper.

 

Inventory 

Estimated Cost $-$$$$

—- Businesses that are selling physical products will likely need to maintain an inventory. Depending on the business, an investment in inventory can range from a few thousand dollars up to several hundred thousand dollars. 

 

Employees 

Estimated Cost $-$$$$

—- Employee wages, benefits, and health insurance can be a significant part of your startup costs. In the early stages of a business startup, owners can lessen the costs of employees and benefits by hiring them as needed and paying them as 1099 independent contractors. 

 

Organization 

Estimated Cost $-$$ 

—- If you’re setting up your business as a corporation or a partnership, you may need to hire a lawyer, which can cost several thousand dollars, to prepare the legal documents, such as the articles of incorporation, bylaws, or a partnership agreement. The least expensive organization structure is a sole proprietorship since you’ll likely only need to file a business name with the local court clerk.

 

Working capital 

Estimated Cost $$-$$$$

—- You’ll need enough working capital to operate until more cash is coming in than going out. A good rule of thumb is to be able to cover at least 6 months of expenses, but each business has its own unique cash flow pattern. The financial projections in your business plan will give you some insight about the timing of your cash flow and how much capital you’ll need to fund the deficits.

If you’re selling on credit terms to your customers, there will be a gap between the time you pay your suppliers and employees and when you receive payments from your customers. You’ll need enough working capital to cover this cash flow deficit in the meantime. 

 

Tax deductions 

—- The good news is that some of your business startup expenses will be deductible on your tax return. You can consult IRS publication 535 – Business Expenses to learn which ones are deductible.

Step Three: Fund Your Startup

After you’ve gone through this checklist of business startup expenses, you can begin to determine the amount of funds you’re going to need. The total should include the initial purchase of equipment, leasehold improvements, inventory, supplies, and enough funds to cover cash flow deficits until the business begins to produce a profit. 

The first source of funds will be the savings you have put aside to start your business. Self-funding is always the best source since you retain complete ownership over your business.

If you don’t have enough savings to cover your startup costs, the next sources would be to either to apply for additional financing or solicit outside investors. If you have an excellent credit history, banks would be desirable alternatives, but you have to go through a rigorous credit approval process. Another source of startup business loans are online lenders, such as Lendio. 

You can contact Lendio to learn the various types of financing options they have available to fund startup businesses.

Resources:

Small Business Administration − “Calculate Your Startup Costs”

SCORE − “Startup Expenses”

Small Business Administration − “Fund Your Business”

Internal Revenue Service − “Publication 535 – Business Expenses”

 

Disclaimer: The information provided in this blog post does not, and is not intended to, constitute business, legal, tax, or accounting advice. All information, content, and materials available in this post are for general informational purposes only. For advice specific to their situation, readers should contact their attorney, business advisor, or tax advisor to obtain advice with respect to any particular matter