Many people find the idea of starting their own business very appealing. However, with so much uncertainty, it can be intimidating to leave the safety of a stable job and take on so much risk. Therefore, it’s essential to understand why you want to become an entrepreneur and not just jump into it because you think it looks interesting or exciting.
However, as soon as you receive your first order – an actual sale to a customer or client – you can celebrate because there’s no feeling like being successful at what feels audacious. It’s great to have others acknowledge your efforts, too – and so rewarding to feel proud of oneself for making the sale that delivers one’s first real success!
Starting a business requires specific qualities that we described in this article. Beyond this aspect, it can also be an expensive experience. Some might find it hard to keep up with such expenses. But you may not need as much investment to get your startup off the ground, depending on what kind of business you intend to start.
If you’re launching a new business, it’s crucial to have the right mindset. You’ll need to consider many startup costs before becoming fully operational and generating income. Every company will cost money to run, and many different factors affect this. The list below outlines some of the expected startup costs that people may encounter while getting their businesses up and running:
How to calculate the cost of starting a business
It’s time to create a financial projection for your business. Your business plan should include estimates of your revenue, profit, and expenses for the next three to five years.
This template can help you estimate your initial costs and how much money you should ask for when seeking startup funding.
A business startup can be expensive, but it is not all-encompassing. It is essential to remember that many of the costs listed below are recurring. These include rent, office supplies, and payroll costs.
You can calculate your startup costs based on the amount of money you plan to spend upfront. That way, you can prepare for the future and know you will have enough funds to cover the first few months of your business.
14 business startup costs to plan for
Starting a business is not cheap. Depending on your specific business and industry, your startup costs can range from $0 to millions.
Business startup costs can be:
Equipment: $10,000 to $125,000
When almost every business needs to finance equipment immediately, it can range anywhere from $10,000 to $125,000, depending on the industry and size of the company.
For example, if you are starting a new business, you will need to secure financing for the truck to transport your products. If you are opening a restaurant, you will need to buy commercial-grade ovens, stoves, dishware, and cooking utensils.
A successful business is profitable. The more you make, the more you will have to pay taxes and other business expenses. If you hire employees, you’ll also have to pay for benefits.
Incorporation fees: Under $300
The first step in starting a business is to select the type of business entity you want to use. Limited liability companies are the most popular business entity for most small businesses.
There are various ways to incorporate your business, so make sure you do your research before filing. The filing fee can range from $50 to $725, depending on the state.
In most states, the license fees range from $200 to $300.
Formerly known as the Amazon Fulfillment by Amazon (FBA), the service allows you to store inventory in Amazon’s warehouse and have the company handle shipping. Other benefits of FBA over standard dropshipping include that you don’t have to worry about inventory or customer service. However, with FBA, you’re subject to Amazon’s rules and regulations.
For instance, Amazon does not offer the option to make a payment on its website. Instead, you have to visit the website of a 3rd party provider and make the payment there.
What’s more, many service businesses are not allowed to sell products to customers at all. For example, you cannot sell insurance to customers or perform accounting services. Therefore, if you plan to open a service business, you must obtain a license.
Many service-based businesses do not require a license. For example, you do not need a license if you provide legal services or act as a real estate agent. However, if you offer medical services or sell health and beauty products, you will need a license.
Office space: $100 to $1,000 per employee per month
Once you have your office space, you will need to calculate the number of employees you expect to have and multiply that by the square footage of the office or retail space. This will be a significant part of your fixed costs, so you want to make sure you get a good return on your investment.
Naturally, you can always find lower rates, but that is most of the time because you are getting a space already in use.
Most landlords require a security deposit. The deposit is usually equal to the first month’s rent, but it can also be a percentage of the rent for the entire term. It is essential to understand that the security deposit is an insurance policy that the landlord is taking on to protect against damages to the property.
The costs of running a service-based business can be mitigated by working from home, using coworking spaces, and traveling directly to your clients. It’s also possible to own a business, such as a consulting firm or a freelance writer, and work from anywhere.
The costs of running a service-based business can be mitigated by working from home, using coworking spaces, and traveling directly to your clients. It’s also possible to own a business, such as a consulting firm or a freelance writer, and work from anywhere.
Inventory: 17% to 25% of your total budget
Inventory is a big part of running a business, and it’s important to start securing it early.
When it comes to inventory management, you don’t want to order too much inventory at the beginning of the season and then run out. But, on the other hand, you don’t want to order too little merchandise in the middle of the season and risk losing customers who won’t wait for items on backorder.
Take the case of a manufacturer who had just finished the production of a new item. At the end of the season, he ordered just enough inventory to cover the previous season but not enough to keep his inventory below a certain threshold. He maintained an adequate stock throughout the season, but the risk of not having enough inventory at the beginning of the next season was very high.
Marketing: Below 10% of your total budget (even 0%)
Suppose you want to keep your overall marketing costs to a minimum. In that case, you should try to keep your advertising materials to no more than 10% of your budget.
In brief, if you are spending $1,000 on your marketing budget, you should be spending no more than $100 on your advertising materials.
You can get much mileage out of social media marketing without spending much money. By spending time and energy on your business instead of advertising, you can grow your business and build a loyal customer base for free.
Website: Around $40 per month
Your business website should have a professional appearance, be easy to navigate, and provide information about your services, products, hours, and contact information.
If you are a beginner, you can create a website using services like Wix, Squarespace, and Weebly. You can also use free templates and pay a monthly or yearly subscription fee for premium plans.
Weebly: $9.99 per month for the standard plan.
Squarespace: $12 to $34 per month for a basic plan.
The best eCommerce platform for small businesses is Wix.
You get a free account for 14 days, and you can then choose between a standard or premium plan. Prices start at $13 per month for the standard plan and $39 per month for the premium plan.
Squarespace: $12 to $18 a month billed annually, or $26 billed monthly.
You don’t need any technical expertise to set up a basic, free website. These services make it easy for you to get started. Hence, you can create a free website for your own business or as a portfolio. It is not necessary to pay for the domain name or the hosting.
On the other hand, you will need to invest in the tools to design and build a website.
Websites are now able to store and sell media. As a result, the demand for content is growing, and so is the ability to create, manage, and sell content.
The best solution is undoubtedly a self-hosted WordPress website if you are a little more technical. You will probably spend more time learning to use the platform. However, its design and customization possibilities and cost make it incomparable to the options mentioned above. There is a reason why WordPress is behind nearly 40% of all websites!
Office furniture and supplies: 10% of your total budget
If you’re an office worker, you’ll need a desk, a chair, a computer, and a phone. You’ll also need a break room, small office supplies, and computer programs like your accounting software.
Your total cost of furniture and supplies should be about 10% of your budget. If you’re going to go with the most expensive option, make sure you have enough money to cover it. Nevertheless, if you’re looking for a budget-friendly solution, you’ll be surprised at the number of options available. In the long run, you’ll spend less money on furniture.
Utilities: Around $2 per square foot of office space
You’ll be responsible for paying the fixed costs of rent, a down payment, and any additional utility costs. The average price of utilities for commercial buildings is $2.10 per square foot.
Installing a new HVAC system will likely cost you a couple of thousand dollars in addition to the installation and monthly maintenance fees.
And the installation itself can be time-consuming, with an average of five to seven hours of labor required.
How to Manage Your Payroll Department
You should always pay your employees even when you’re not making a profit. You’ll need to set up a sound payroll system to handle the payroll. For example, suppose you are running a startup and need to calculate your payroll costs. In that case, you must factor in insurance, payroll tax, and employee benefits.
A conservative payroll budget is likely appropriate if you are a sole proprietor or run a small business.
A professional consultant can charge between $1,000 and $5,000 per year.
DIY might be more accessible and less expensive if you’re just getting started. But if you’re a seasoned entrepreneur, working with experts and professionals can help you streamline operations, stay on top of the latest trends and save money.
For example, you can choose to work with a CPA (Certified Professional Accountant) who specializes in human resources and can help you understand your legal obligations as an employer, help you select an employee benefit program, and ensure you’re fulfilling your responsibilities as an employer.
If you are a small business owner, you can manage your business’s finances without a full-time accountant. However, it is good to consult with your accountant on a monthly, quarterly, or annual basis to review your financial statements and general financial guidance and advice.
Suppose you are looking for a good CPA or an experienced lawyer. In that case, you need to know how to negotiate your costs and understand fees. It’s good to research the average rates for your kind of legal work. Then, you can use the results to determine which services are right for you and find a good fit for your budget.
You will be able to keep track of your business transactions with accounting software. For example, processing and managing payroll, creating and tracking invoices, and managing your business bank account are things you can do with basic bookkeeping.
Most small business owners spend between $1,000 and $5,000 per year on administration tasks, including accounting and legal fees. But as a startup, you can save money by following the cost-cutting tactics mentioned.
Insurance: Averaging $1,200 per year
Suppose you want to protect your business from lawsuits, fires, and other disasters. In that case, you need to protect your business from the unexpected. Startups need insurance to protect their business. It’s the only way to protect your business from loss or damage, which can be devastating. Likewise, if you want to protect your home from financial ruin, you should insure it. It can also help protect you from lawsuits and other accidents.
Your insurance premium will be higher if you work in a high-risk industry. This will be the most significant factor affecting the cost of your insurance.
– Commercial property insurance: It will cost anywhere from $300 to $2,500, depending on the type of property, the value of the asset, and the location.
– Workers’ compensation insurance costs vary based on the size of your business, your location, and your payroll.
Suppose you’re an individual or small business. In that case, you can get errors and omissions insurance for about $2,000 to $5,000 a year, depending on your business’s size, industry, location, revenue, legal history, and the quality of your contracts and employee training procedures.
Business liability insurance: The amount depends on your business, size, industry, location, revenue, legal history, and the quality of your contracts and employee training procedures.
Taxes: Flat, 21% corporate tax rate
The key to business tax planning is to make sure that you’re saving as much money as you can on taxes. This means that you need to be aware of what you can deduct and ensure that you’re taking all the steps to save money on taxes.
Currently, federal income tax is a flat 21% rate for most corporations. Business income and losses pass through to the owners’ tax returns. The pass-through entity may be able to deduct 20% of the payment before paying taxes.
If you are a first-time seller, finding a qualified CPA can be challenging.
Factor Travel Into Business Startup Costs
The cost of starting a business is only one part of the equation. For example, if you’re a consultant or go to your customers directly, you will be traveling a lot. You can easily calculate the cost of travel and food for your employees and multiply these costs by the number of employees if you have multiple employees.
When traveling for business, it’s essential to consider how to make money while you’re on the road. You will need to consider your expenses and how you can earn money while you’re traveling.
Make sure you only buy the cheapest flight you can find. It’s a waste of money to buy business class tickets when you’re flying coach.
Shipping Costs Can Be A Huge Barrier to Entry for Small Businesses
You probably don’t need to read further if you’re a service-based business. But if you’re in retail, you may be shipping products to customers. Depending on what you’re sending, these costs can reach thousands of dollars.
Small business owners can use services like Stamps.com to ease the burden of shipping costs. For example, you can print postage without buying a costly postage meter with this service. In addition, you can secure free or low-cost shipping boxes from your shipping service if possible.
Some tips on how to save on startup costs.
The costs can certainly add up if you start a business, with many expenses being non-negotiable. So be sure to do your research before you splurge on high-ticket purchases, and recognize that there are ways to take care of some of these startup costs on the cheap.
The possibilities are endless. One of the easiest ways to reduce costs is to use software like QuickBooks. Working from home or using a coworking space is a cost-effective alternative to leasing office space. And leveraging social media can mitigate your marketing costs.
It’s not always worth spending much money on equipment. Of course, it’s vital to purchase the right equipment, but you’ll have to make a few investments. Hire a lawyer or accountant if you’re confused. And make sure your website and advertising campaigns are professional-looking and effective.
How To Find Startup Financing
You can find out about the various types of financing available and where to find startup financing.
A brand-new business will probably receive its initial funding from debt and equity financing. Small-business loans are relatively limited for new companies. Most lenders are not comfortable lending to new businesses without a track record of profitability or hard evidence of creditworthiness.
Don’t completely rule it out if you think it’s your best option, as some lenders work with startup business owners. However, if you think debt financing is the right move for you, you might want to check out more information on how to get a loan to start a business.
It’s a great way to get a business credit card.
Once you have a legal entity for your business, you should apply for a business credit card.
A business credit card is usually easier to qualify for than a traditional business loan because the application is simple. If you have a higher credit limit than your card, you can use it more. In addition, a business credit card keeps your personal and business finances separate, which is essential if you wish to maintain your liability protections after forming a corporation.
Don’t be tempted to charge more than you can afford. This will damage your credit score, making it harder to get a small business loan down the line.
Frequently asked questions
How much does it cost on average to start a small business?
Small business owners can expect to spend anywhere from $10,000 to $100,000 or more to get their business off the ground. The average cost of starting a small business varies depending on the type and size of the business you’re opening.
How do you calculate the costs?
A startup budget template will help you determine your startup costs and recurring expenses, such as rent, office supplies, payroll, etc. Then, start your business with a six-month financial cushion to support you when your profit margins might be slim.
Are your business startup costs tax-deductible?
You can deduct only $25,000 of your total startup costs if you are an individual and start a business. If you are a sole proprietor, you can deduct only $5,000; if you are a partnership, you can deduct $10,000; and if you are a corporation, you can deduct $25,000. If your income is $50,000 or more, you can deduct only $5,000, but if you are a corporation with no income, you can deduct $25,000.
If you are uncertain about the tax consequences of a particular action, you should consult a qualified tax professional.
The material in this article is intended to be used for educational purposes only. It should not be construed as legal advice.
Startup Costs
Startup costs are the expenses you incur when starting a new business. These costs include taxes, insurance, and other costs related to starting a business.
The cost of starting your own business can vary greatly depending on your business type and industry. For example, a brick-and-mortar business will need to pay to rent a separate business location. In contrast, a home-based online consulting company does not.
The bottom line
Your budget will help you determine if you need to borrow money to start your business. It will also help you decide whether you will be able to afford to pay back your loans. Budgeting is an integral part of being a financially responsible adult. You have to make sure that you have enough money to pay all of the usual startup costs and still have enough money left over to spend.
It’s also essential to make sure that you stick to your budget. If you don’t have the money, you can borrow it, but make sure you can pay it all back. Borrowing money, especially to start a business, can be risky. Make sure that you can pay back what you owe and decide if you need to borrow money before doing so.
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