Deciding to start your own business is an exciting moment for any entrepreneur. But sometimes that excitement is met with uncertainty when thinking about the financial aspect and initial startup costs. There’s a lot that goes into a business to get it up and running, specifically in the early stages — and startup costs require very careful planning with strong attention to detail in the accounting area. Understanding these costs can help you parse your financing options too.
First, your startup costs cannot even be considered until you develop a business plan. A business plan will help you think realistically and objectively about your future business, and make it easier to communicate planning objectives and strategies to other constituents. It will also force you to consider the true costs of starting your business.
Example Business Startup Costs
Most small businesses fall into three categories: online, service providers or brick-and-mortar. We’ve listed some of the most common startup costs below, but not all will apply to your business depending on the type of company you intend to start.
The 10 most common startup costs include:
- Office space and utilities
- Equipment and supplies
- Licenses and permits
- Lawyer and accountant
- Employee salaries or contractor costs
- Advertising and marketing (including your website)
It may seem daunting to think about everything that needs to go into your business, especially if you have aspirations to continue growing. We recommend you start small, test your idea, gain customer validation of your product/service and build on growth opportunities from there.
Though startup costs are not necessarily included in your future vision for the company, that makes it easy to overlook these costs when you’re thinking about the future. When calculating startup costs, focus on the present and initial costs — don’t get overwhelmed.
Understand the Costs of Starting a Business: Estimate Your Expenses
Every type of business has its own financing needs, but one of the main reasons most small businesses fail is because they run out of cash. When planning your costs, it’s important to estimate your expenses and plan for miscellaneous costs that can arise as you’re just starting out. There are different types of costs to consider, and each type can help you better manage your business’ cash flow. Here are a few types of costs business owners should consider:
- One-time vs. ongoing: These types of expenses are especially relevant in the startup phase. For example, incorporating your business is a one-time purchase. Money going out that month will likely be more than money coming in, and you may have to make up for it the following month. Ongoing costs, such as utilities or rent, are paid on a regular basis and can be projected. These costs typically do not fluctuate (at least not without warning).
- Essential vs. optional: Essential costs are just that — essential for business growth and development. Optional purchases should be strongly considered in the startup phase until you have a cash reserve to cover the purchase.
- Fixed vs. variable: Rent is considered a fixed expense because it’s consistent month-to-month. Variable expenses can be costs of products or services — like shipping, which will change depending on how many orders you have coming in, for example.
Project Your Cash Flow
This is a very important aspect of a startup’s financial planning. Projecting your cash flow for the first three to six months of your business life will help you get an initial understanding of how all of your costs add up. This doesn’t just include fixed costs, but also estimated costs of goods and services.
For example, if you take out a loan, make sure you know how much you borrowed, the interest rate and your timeframe to pay it off. This will help you better project how much revenue is needed to keep the business viable and how much cash is necessary to start it up. Luckily for small businesses, there are many financial platforms, such as QuickBooks or Freshbooks, to assist with accounting, tracking expenses, etc.
Find Financing Opportunities
Once you’ve determined your estimated startup costs, it’s time to look into different funding options. There are plenty of resources to help you find the right financing for your small business. Whether that’s a small business loan, cash advance, loan for an equipment purchase, leasing, alternative loan options or business credit cards.
In the beginning, it’s likely that your funding will come from a combination of these resources since most lenders offer larger loans to established businesses with evidence of profitability. However, there have been an increasing amount of financing opportunities for small businesses — you may just need to do some additional research first. It’s never too early to start looking into all of your options.
While you’re projecting your business startup costs, don’t forget to include costs to officially form your business. You launch your company with Incfile starting at only $49 + state fees. Find out more today.