Startup Costs for Small Businesses

Nothing in this article constitutes financial advice. Please consult a professional if you have questions about financing your business.

When you reach the financial planning stage of your new business venture, things like startup costs, budgeting and funding start to get real.

If you’ve come this far, you’re clearly serious about starting a small business, so now it’s time to get yourself financially ready for the future.

Calculate your business startup 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.

No two companies are the same, but there are some startups costs that pretty much all small business owners will need to find the money for:

  • Location – (are you renting or buying? Do you need to budget for decorating and fitting out)?
  • Professional equipment and supplies
  • Software
  • Employee wages and training
  • Marketing & advertising (including website development)
  • Inventory
  • Insurance, licenses and permits

When we surveyed 1,000 small business owners in the U.S., these were the largest startup costs they found themselves covering:

  • 53%: inventory/supplies/raw materials
  • 48%: lease/purchase of space
  • 46%: office equipment
  • 42%: marketing & advertising
  • 39%: professional equipment

You can use your 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: setting a low price to boost initial sales and market share, before then raising prices over time.
  • Premium: setting a high price to show the exclusivity and quality of your products.
  • Milking: setting a high price before gradually lowering it in stages to make your products available to more markets.
  • Competition: strategically setting your price in line with competitors.
  • Psychological: setting prices to psychologically influence the consumer, like charging 99p instead of £1.
  • Bundle: 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 here:

  • 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
  • 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.

Consider cost-cutting

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, how and by how much.

With any new venture, you can expect things to be tight for the first few years of opening, a new venture, and your focus will often fall on how to maintain positive cash flow to keep your business afloat.

This was something that concerned nearly half of the business owners that we surveyed, who found themselves making some big decisions about how to reduce their expected outgoings. The top three strategic choices made to reduce costs within their budget were:

  • Delaying the purchase of certain items or doing without altogether
  • Choosing an alternative location at a lower price
  • Limiting the scope of products or services for duration.

To begin the cost-cutting process, work through all your expenses and do further research to see if you can bring them down. Be sure to analyse each option for 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 increase cash flow that way.

Prepare financial documents

There are a number of documents you can create which will help you project the financial viability of your business. And it will feel great to get all the numbers down in writing, instead of storing them in your head.
The three documents below can be used to support your business plan, and will play an ongoing role in managing your business’s operations.

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.

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.

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.

Get funded

Whilst some individuals may find it possible to “’bootstrap’” their new business — that is to fund it independently — external capital is needed in most cases. There’s a wealth of choice available, with some of the most viable sources including:

  • 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.
  • Government grants and loans
  • Seed Enterprise Investment Scheme
  • Enterprise Investment Scheme
  • Bank loans are notoriously hard to secure, which is why we didn’t include them here. This is not to say that you shouldn’t apply for one but be aware that only a handful of businesses are successful in their application.

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:

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.

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:

  • fast checkout
  • easy app integration
  • essential team management software
  • free inventory software
  • customer directory
  • 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.

Start invoicing with Square

Keep track of your client invoices and payments 24/7 with Square Invoicing. Our handy software makes sure you get paid faster with instant invoices to suit your startup needs.
It’s free to get started, just pay 2.5% per transaction. Then, as your business grows, you can use our advanced invoicing tools to manage your cash flow more efficiently.

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 £16, while our fully-integrated Square Register is the premium option at £599. You can spread the cost of payment with our interest-free instalments.

This article is intended to offer helpful guidance and does not constitute qualified financial advice. Please consult an accountant or financial advisor if you have any questions.