Have you reached the financial planning stage of your new business venture? Are startup costs, budgeting and funding starting to become a little intimidating?
Firstly, If you’ve come this far, well done! You’re serious about starting a small business, so now it’s time to get yourself financially ready for the future.
The importance of calculating start-up costs
A start-up cost is a one time cost that is paid in order to get your business up and running.
Some businesses require very little investment to cover start-up costs. But, as a result of poor planning, or time constraints, many new businesses can overspend before they even open their doors. To set yourself up for success, you need to make sure you have a thorough and accurate understanding of what your start-up costs will be.
Jumping into business based on inaccurate numbers or a budget that doesn’t detail all of the costs may cause you problems from the get-go, and also prevent you from achieving your short term and longterm business goals. Here are a few handy tips to get started.
Conduct market research
If your start-up is your first step into a new industry, it’s worth conducting some research about what you can expect to encounter. This could include any unique or quirky industry considerations you were not previously aware of.
Market research will help you become familiar with your future customer base and your competitors. It will give you a better idea about your chosen industry, as well as the size and scale of the market in which you will be operating. It will also help you get a sense of future trends and opportunities that may guide your business approach and development.
Research common business start up costs
Before you dive into the complexities of variable day to day costs, start out with your fixed startup costs. These are the expenses you’ll need to cover during the process of building your new business from scratch.
Remember, no two businesses are the same. Below we’ve outlined a list of business start up costs that many small business owners will incur at the time of startup.
Consider where your business will be based, and if you need to rent or buy a premises. You may need a single office, a shop front, or a warehouse. Some businesses operate out of traditional brick and mortar stores as well as online stores. You may even be able to set up your business from your home. It’s handy to document any potential costs for setup, fit-out and decorating. You will also need to factor in the cost of connections for any utilities that are required at the premises.
2. Professional equipment and supplies
All businesses need supplies, even if they are very basic. From a laptop to a coffee machine, a table to a lawnmower, you are likely to need to acquire some tools of the trade. A key consideration is if you want to lease or buy these items.
3. Software, hardware and technology expenses
Software and hardware can help you streamline your invoicing, payments, team management, marketing and accounts. Depending on the nature of your business, you may also need programs for record-keeping, and payroll-related tasks. You may also need tools that enable you to carry out transactions and receive payments, like a point of sale device.
Accept every payment quickly, easily and securely.
4. Employee wages and training
Taking on staff requires commitment and planning to ensure you fulfil your responsibilities to your employees. They need to be paid fairly for the work they do, and supported and trained about their role. As a business owner, you are responsible for keeping your employees safe at work. Even sole traders need to stay aware of current industry trends and best practices by attending courses and workshops.
5. Marketing & advertising (including website development)
There are sure to be costs associated with letting people know you are open for business. A marketing plan will help you determine how much you will spend on promoting your business, and through which channels. You may also need to spend on website hosting, development or content.
6. Insurance, licenses and permits
Most businesses require some form of license or permit to operate in their particular industry or field, so make sure you research prior to launching. You will also need to understand any insurance you are required to pay, which could include Public Liability Insurance, Professional Indemnity Insurance, Product Liability Insurance or Vehicle Insurance.
7. Professional services
Many startups will require the services of professionals in order to support the business and to hit the ground running. This may include accountants to advise on a tax-effective business structure or a lawyer to draw up important contractual documents and applications for certain licences. You also may need asoftware delivered as a service, or an IT consultant to help set up the computer systems necessary to run your business.
8. Registration costs
You will need to obtain an Australian Business Number. If you want to name your business something other than your name, then you also need to complete a Business Name Registration. Keep in mind that other registrations may be applicable, such as Vehicle Registration.
Additional startup cost considerations (for unexpected expenses)
Life as a business owner is unpredictable, it pays to have some extra money set aside for any unexpected set-up costs. Having some extra funds available can help see you through the ups and downs of a business start-up and the challenging early days.
These are some of the largest startup costs businesses can find themselves covering:
equipment (which can range anywhere between $10,000 to $125,000)
renting an office space (can cost anywhere between US $100 to $1,000 per employee each month)
inventory (up to 25% of your budget)
You can use a business plan to decide on the costs you’ll need to consider and those that are not relevant to your startup.
Create a pricing strategy
There are a number of pricing strategies that you can use to shape your small business. Some are more permanent, whilst others are designed for use during a set period of time.
Economy pricing: Setting a low price to attract thrifty customers.
Penetration pricing: Setting an initially low price to boost sales and market share, before then raising prices over time.
Premium pricing: Setting a high price to show the exclusivity and quality of your products.
Milking pricing: Setting a high price before gradually lowering it in stages to make your products available to more markets.
Competition pricing: Strategically setting your price in line with competitors.
Psychological pricing: Setting prices to psychologically influence the consumer, like charging $3.99 instead of $4.
Bundle pricing: Bulk reducing the price of a group of products.
The key to setting your costs is knowing what your customers are willing to pay, as well as how much revenue you need to make to achieve positive cash flow. Sometimes these will be hard to align, but if you can achieve the balance, you’ve found a good price point.
Set your budget
This hopefully feels like a familiar process, albeit on a larger scale than you’ve been used to in your day-to-day budgeting. Your business budget acts as the framework for your income and expenses, so you can plan towards your break-even and profit points. As well as a tool for internal use, it’s a necessary resource for any lenders that you plan to approach.
Your budget should include your startup costs, as well as the incurred expenditures that must be covered month to month for the coming year. You can see a breakdown of this below:
The cost of opening: your business startup costs from above.
Monthly fixed expenses: outgoings that are unlikely to fluctuate, such as rent and insurance.
Monthly variable expenses: outgoings that are likely to fluctuate, such as stock and staff wages.
Monthly personal expenses: both fixed and variable outgoings relating to your own personal costs, like mortgage payments.
Monthly revenue: the money you estimate you’ll make, and
Healthy cash flow is essential to a healthy business, meaning that the combined total of the first four expenses should be less than your monthly revenue — or the same as, at the very least. Any money left over at the end of each month can go towards unexpected costs (like repairs) or long-term growth.
In the likely event that your initial workings highlight a lack of funds to cover all your costs, you can then look into which expenses can be lowered, and by how much.
With any new venture, it’s normal forthings to be tight for the first few years of opening, and your focus will often fall on how to maintain positive cash flow to keep your business afloat.
This was something that concerns a range of businesses. The Business Impacts of COVID-19 Survey found that small businesses in 2020 were around twice as likely to report difficulty compared to their large business counterparts. Some of the three choices businesses can make to reduce their costs can include:
Delaying the purchase of certain items or doing without altogether.
Choosing an alternative location at a lower price and,
Limiting the scope of products or services for duration.
To begin the cost-cutting process, you can work through all your expenses and conduct further research to see if you can bring them down. Be sure to analyse each option and consider its downsides too. For example, using cheaper and, consequently, lower-quality ingredients in a restaurant could potentially impact your customers’ experience of the food they order and have a negative effect on your business.
If the negative impact of cost-cutting seems too risky, or if there are expenses you simply can’t reduce, it’s time to revisit your pricing strategy and assess how you can increase cash flow.
Prepare financial documents
There are a number of documents you can create which will help protect the financial viability of your business. And it will feel great to get all the numbers down on paper.
The three documents below can be used to support your business plan and will play an ongoing role in managing your business’s operations.
1. Break-even analysis
A break-even analysis helps determine the fixed costs and variable costs you’ll incur, so you can correctly set your prices and predict when your business will become profitable.
2. Profit & loss statement
The Profit & Loss Statement (or “Income Statement”) projects your business’s cash flow and performance in its first year by working out your future profit potential and the tax you’ll have to pay.
3. Balance sheet
The ‘balance sheet’ or ‘statement of financial position’ reveals your business’s assets, liabilities and shareholder equity at a specific point in time. It’s a quick snapshot of your business’s financial position.
You can find out more about some of these financial documents and others in our article on the essential components of a financial analysis.
Whilst some individuals may find it possible to bootstrap their new business — that is to fund it independently — external funding is needed in most cases. There’s a wealth of choice available, with some of the most viable sources including:
*Square Business Loans - Get a customised offer based on your card sales through Square, and then choose your loan size.
CTA (Square Loans)
Angel investment – an individual investor who funds your startup, usually in exchange for ownership equity.
Crowdfunding – you can use sites like Crowdfunder and Kickstarter to share your business idea with the public and collect donations towards your startup costs.
Seed Enterprise Investment Scheme
## How Square Can Help with Startup Costs for Your Business
Square has a variety of free and low-cost tools to help get your small business up and running. Below you’ll find just some of the ways Square can assist your startup:
1. Start a free online store with Square Online
Whether you’re looking to support your brick-and-mortar store with an online counterpart, or your business is purely dedicated to eCommerce, Square Online saves you the initial expense of building a website.
Setting up your online store is quick and easy, so you’ll be ready to sell across multiple devices and platforms in no time. Better still, there’s no monthly fee – you only pay when you make a sale.
2. Use Square’s Free POS Software
If you plan on selling in person, get started with Square’s free POS software. This bespoke system is completely customisable with a range of features, including:
Easy app integration
Essential team management software
Free inventory software
Reporting and analytics tools.
Just download the app onto your phone or tablet, create a free account and you’ll be ready and raring to go.
3. Start invoicing with Square
Keep track of your client invoices and payments 24/7 with Square Invoices. Our handy software makes sure you get paid faster with instant invoices to suit your startup needs.
It’s free to get started. Then, as your business grows, you can use our advanced invoicing tools to manage your cash flow more efficiently.
4. Accept card payments with Square
Our easy-to-use payment hardware collection includes a range of devices to suit your purpose and budget. Each one accepts contactless, chip and PIN, Apple Pay and Google Pay for customer convenience.
Square Reader is among the most affordable card readers at $59, while our fully-integrated Square Register is the premium option at $1,099. You can spread the cost of payment with our interest-free instalments.