Regardless of how you feel about its significance, money is a necessary part of life. This is particularly true if you are going into business, especially in the startup phase. Adequate funds are a necessity for your growing venture, not an extra.
As a startup owner, you don’t want a lack of understanding of crucial business startup costs to hold you back. Knowing the critical startup costs can help you to better estimate the expenses involved in building your business to viability and potentially attract other means of funding due to your demonstrated aptitude.
You must be prepared to handle startup costs. It is common for entrepreneurs to become so enthralled with the starting of their business that they neglect to prepare appropriately. The most sure-fire way to determine startup costs is to develop a business plan or pitch deck. These documents will help you to create a structure with which you can grow and manage a startup. Even with a simple plan, you can focus on key elements of your business, such as customer segments, revenue streams, key activities, and product line. Some cost is involved with each of these four aspects of your business and more. Key actions and expenses can be overlaid on your road to success this way. To grow, you will need money, and a business plan or pitch deck is the first step in educating yourself on building or operating your business. Having a good plan will also help you realize where you can cut costs and save. Be realistic when setting goals, timelines, and establishing products. This way, financial obligations will be clearly defined as you start.
While it may be true that no two businesses are precisely the same, a number of startup costs are standard regardless of business structure and industry. The following is a list of these typical costs provided by the Small Business Association (SBA) for your perusal whether you are functioning as a brick-and-mortar business, online entity, or service provider.
According to e-commerce giant Shopify, 23% of businesses were surprised by the legal costs of starting a business. Included in these legal costs are registering and incorporating at state and federal levels. Be prepared to file a business certificate or certificate of assumed name and a certificate of incorporation, limited partnership, or articles of organization.
For example, NYC Business Solutions, a set of services offered by the city’s Department of Small Business Services, estimates a cost of $100-$120 for assumed name certification and $125-$200 plus fees for the other aforementioned types of registration. Remember that registration costs vary according to state and county, although you also may be required to file at the federal level at an additional cost.
Insurance & Permits
When starting your business, you need to be prepared for any and everything. Included in this is preparation for the worst-case scenario, which is where the proper permits and insurances come into play.
Insurance is a critical startup cost to protect yourself and your team and business assets. Many entrepreneurs in the beginning stages are surprised by this cost. However, insurance is manageable in your budget. In the event of liability accidents, even a low-cost insurance plan can equip you with adequate coverage.
If you are in an industry such as agriculture, wildlife, aviation, or broadcasting, federal authorities will be regulating your business, not local authorities. If you’re in one of these industries, your permitting starts at the federal level. State permits come in when certain activities are performed. Some requirements you may run into are health and sales-tax permits.
An invaluable resource for understanding local and federal regulations is your local secretary of state. They can also help you realize what’s needed for your business’s legal standing. Permits can range from under $100 to a few hundred dollars. Do your due diligence through research to know these costs.
For your business, you will need a functional space to launch your venture properly. Though home-based businesses are on the rise, many startups find value in having an office, warehouse, or kitchen to find success.
Startup costs related to your space include a downpayment, security deposit, Internet connectivity, utilities, and (possibly) remodeling. If you are honest about your needs, it’s possible to keep these costs low. A co-working desk is a beginner space level that costs an average of $150 per month and quickly escalates from there.
Equipment & Supplies
You’ll likely quickly see that equipment and supplies are quite a critical startup cost. Without them, you will not have what you need to effectively provide your products or services to customers.
Michigan’s Small Business Development Center lists furniture, office supplies, point-of-sale systems, vehicles, and shipping needs as equipment items to be mindful of. Depending on your business, the cost of supplies could run between a few hundred dollars for a simple office setup to several thousand for more equipment-reliant companies. There is no limit to this expense. Aim for leanness in the beginning.
While it’s true that the more products you have, the more you can sell, pinpointing inventory costs can be tricky.
Once again, Shopify has researched this and found that almost 32% of business costs came from products, including inventory needs. A twist to this line item to be wary of is the cost incurred by surplus inventory.
It would behove you to find a good balance for your inventory depending on product lines, the manufacturer’s suggested retail price (MSRP) of each, and the markup. Work with direct sales numbers to understand your inventory needs more efficiently.
Marketing tends to be a powerful tool for startups because it can get the word out about your business to potential customers who may not have been aware of your existence due to its ability to boost brand awareness without big spending.
In the beginning phases of growth, you can start with a relatively small marketing budget. Concentrate on the necessities of a simple branding kit (logo, fonts/colours, social header), your website, business social accounts, and word of mouth (start with friends and family).
A do-it-yourself approach will help in retaining a small marketing budget. Canva and similar tools have free and premium plans at around $100 a year for all branding and marketing assets. Website needs can be satisfied for about $140 a year with platforms such as Squarespace and others. Start with free social media accounts, then upgrade to premium once your budget allows.
Though payroll is considered a rather significant startup cost to cover, it depends entirely on your needs. In the beginning, it could just be you. Maybe it’s you and a few employees. Then again, perhaps it’s you and freelancers. Don’t take on the cost of employees if it’s viable to run things well solo. Setting aside enough for payroll could mean covering your living expenses for a few months. Depending on city or state rules, it could mean minimum wage for an employee or a freelance budget set aside for one-off projects.
A lawyer and an accountant are considered two standard startup costs by the SBA. You should avoid discounting their importance in attempts to cut costs. The financial and legal landscapes may be foreign to you. Having an attorney and an accountant is vital to success since they help you navigate this unfamiliar territory. You will likely save money by evading costly errors. Hourly rates for both of these professional services differ vastly, although it is possible to find options at $100 per hour to keep the rate smaller as you start.
Deducting Startup Costs
Here, your accountant is paramount because quality, accurate financial accounts can save you money at the end of the day. The IRS has a myriad of common, deductible business expenses that can save you from a heavy tax burden. A deductible business expense must be “ordinary” (accepted in your industry) and “necessary” (helpful for your business), as defined by the IRS. Due to the ambiguity of the definition, a good accountant can help you distinguish which expenses are tax-deductible.
Make detailed recordkeeping your aim. A simple spreadsheet saved on your laptop showing various costs and their descriptions will make deducting startup costs easier come tax time.