While you may have a winning business concept, if you’re like many aspiring business owners, there’s one thing holding you back — finances. When you start your own business, there are financial unknowns. That comes with the territory, and it can be intimidating.
Business startup costs are the expenses accrued when first launching your business, and they can vary depending on your industry and scale of business.
While there’s no cut-and-dried formula for figuring out exactly how much it will cost, there are common startup costs and additional expenses that apply in most cases. If you add up those expenses, you can get a ballpark estimate of what you need to get started. And from there, you can start looking into financing options.
To help you estimate how much it will cost to start your business, we’ve outlined what you need to consider below.
Two main startup cost categories
Before you start evaluating what you need, it’s important to know how business startup costs are categorised. They can be separated into two main categories: capital expenses and operating expenses. Here’s the difference between the two:
1. Capital expenses
Capital expenses, also known as capital expenditures, are one-time costs or up-front payments for fixed assets. These one-time expenses are investments in your business that can add value and increase the quality and quantity of the products and services you can provide. The common capital expenses you need to take into account include:
- Business licensing based on federal and state business laws
- Business registration
- Property and rent expenses
- Security deposits
- Technology expenses
- Initial inventory and vendor expenses
2. Operating expenses
Operating expenses are recurring costs that may contribute to startup costs but continue throughout the life of the business, so you also need to allocate funds to cover these costs during the startup phase. Most likely, you need to factor in the following operating expenses:
- Payroll and employee expenses
- Marketing and advertising
- Office supplies
In addition to these costs, you need to account for initial organisational startup costs like legal, licensing, incorporation, and permitting fees.
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Calculating startup costs
1. Determine the must-haves
As you’re looking over these common startup expenses, you may realise there are a couple of them that don’t apply. For example, if you’re a service-based business, you don’t need to consider costs for inventory and shipping. Or, if your business is online, you may not need to worry about travel expenses.
After you’ve looked over the list and have accounted for the line items that do apply, figure out what costs are absolutely necessary to streamline your budget. For example, if you want to save on rent as you’re building up your business, consider alternatives such as a home office or even a coworking space.
2. Break out the numbers
Once you’ve pulled together a list of all your costs, assign an estimated dollar amount for each item. Of course, these approximate costs vary depending on your specific business needs, so do your research.
Consult colleagues in your industry and look online to make educated guesses about what you need for each line item. By taking the extra time to estimate your startup costs early on, you can figure out a realistic financing plan and make a game plan to get started.
3. Conduct a break-even analysis
Once you’ve crunched the numbers and feel confident about how much money it takes to get your business up and running, it’s time to conduct a break-even analysis.
Determining BEP (break-even point) allows a business owner to understand the amount of revenue needed to cover business startup costs and ongoing operational expenses. With this in mind, you can come up with a plan to ensure the profitability and success of your business.
Paying for business costs when first starting out
Now that you know how much it’s going to take to start your business, you need the money to back it up. There are a number of ways to finance your business, but you should always do your research, and talk to your accountant or financial advisor for additional assistance. To get you started, here are a few methods of raising capital:
Loans and grants: Whether from a family member, friend, organisation, or business, there are many options to get started.
Business credit cards or business lines of credit
Investors and/or accelerators
Deducting startup costs from business taxes
Whatever way you decide to pay for your new venture, you should also be aware that you can deduct some startup expenses on your taxes as a business owner. If your total startup costs are $50,000 or below, you can deduct $5,000 in business startup costs and $5,000 in organisational costs.