There are over 100,000 business books on Amazon alone. However, starting a new business can be exciting yet challenging. As an entrepreneur, you would be making an astounding number of decisions every day. Asking yourself questions like “what would be my business start-up cost?” or “What would be the running cost of my business?” All of these questions are gut-wrenching.
Although there are no miracle equations, one of the essential constituents of starting a business – is the initial investment. The cost breakdown is not as convoluted as it sounds; here is a simple guide for you to begin with.
Why is Business Plan Important?
As your first business, calculating the initial investment can be nerve-wracking. The first step to every business is to map a business plan that will help you set priorities, form a financial projection, and set milestones. With a business plan, you will always stay on strategy, and your business objectives will be clear.
Many resources guide you on how to calculate your initial start-up cost. However, for beginners, SBA’s start-up cost guide is a comprehensive template. Additionally, business plans help you secure funds, provide structure, increase clarity, and create a marketing roadmap. Your business plan will become the bible of your business.
How to Estimate the up Cost of your Business Start-up?
Business start-up costs are recurring and uncertain – meaning they can change. However, a financial projection or forecast of 3 years helps you plan your budget and set milestones to achieve your financial goals.
For beginners covering the expenses of the first six months is an estimate of your business start-up cost. The 6-month period will cut you some slack while your secure talent, acquire office space, and purchase equipment. It can cost you anything between 20,000$ to 30,000$. A good rule of thumb is that you always want to keep it to a minimum.
Next are some reasonable estimates of start-up expenses that you may encounter.
Office Space and Related Costs
Searching for the right location can be excruciating. You might require a realtor to search for an office space that resonates with the environment you need for your business. The cost of office space can depend on the number of employees. In New York, office space can cost $14,800 annually per employee.
For example, you might be a company that produces hydroponically grown vegetables; then, you may require a warehouse with enough space to accommodate your equipment. Typically, the costs involved are:
- Security deposit
- Fees of a realtor
- First month’s rent
- First month’s utilities (including phone and internet).
Equipment
Depending on the industry your business lies in, the equipment can cost anything between 10,000$ to 150,000$. Purchasing equipment is a one-time investment and later becomes a start-up asset.
For example, if you are opening a bakery, you need commercial-grade ovens, utensils, and dough mixers. And if you intend to extend your bakery into a café, you might need furniture to accommodate your customers as well.
Another example is computers. Computers are essential equipment required by most businesses. Moreover, the equipment cost also depends on the size of the company and the number of employees. It can vary mainly whether or not you require specialized equipment.
Website
With the advent of any business, a sleek and modern website speaks lengths about your business. Buying a domain name and keeping the website running becomes essential. Other factors come into play, such as the ranking speed and website popularity, both of which ensure traffic.
Attracting traffic to your website can be beneficial for you. However, some content management services have ready-made templates, making website-making easier and cost-efficient. To name a few, WordPress, Squarespace, Wix, and Weebly are some of the options. Their premium plans can range anywhere from $12 to $40.
Incorporation and Legal Fees
Financial implications, taxes, and legal procedures are essential when you acquire your business entity. The fee is between 50$ to 300$ if you register or incorporate your company as a liability corporation in most states.
Depending on the type of incorporation, the costs can be the following:
- A Fictitious Name can cost less than $100
- A Limited Liability Company can cost from $40 to $500
- A partnership can cost from $40 to $500
- A Subchapter C Corporation can cost between $25 to $1000
- A Subchapter S Corporation can cost between $25 to $1000
However, there are many legal costs involved, even if you choose not to incorporate them. You might require a special license and permits from the federal government, depending on your business. Basic business licenses can cost from $75 to $100. Other licenses may cost anything between $100 to thousands of dollars, which are:
- Professional licenses
- Federal licensing
- Sales tax licenses
- Payroll tax licenses
Lastly, a 21% corporate tax rate applies to any business corporation, which must be paid in addition to other licenses and legal fees.
Inventory
Unlike a business that provides services, you might not need an inventory. However, in any sales business, you would need to invest a considerable portion of your budget to stock. Although there is no minimum investment specified, it can range from $100 to $1000.
However, around 20% of your business start-up cost should be allocated for your inventory. Like equipment, inventory is an asset. However, certain factors limit your investment. Never invest so much that:
- It would risk your financial future.
- You will need it in the next 5-10 years.
- Will challenge your peace.
Stocks are another thing you can invest in. Buying stocks can be a risky business, and it’s essential to consider all the factors necessary.
“I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”
― Warren Buffett
Marketing
Creating brand awareness is as crucial as investing in the inventory. If you have piles of products, how will you sell them if no one knows their worth? That’s where marketing comes into play. Marketing plans can cost anything from zero to 10% of your business start-up cost, depending on how you strategize.
Today, there are many forms of marketing: digital marketing being one of them. Traditionally marketing costs are allocated to materials like a business card, banners, brochures, or signs. If you have an online business, you need to employ digital marketing strategies more than traditional ones.
Some of the digital marketing examples can be:
- Affiliate marketing
- Social Media Channels
- Display ads on websites or blogs
- Online Public Relations
- Content Marketing
- Search Engine Optimisation
- Digital Advertising
- Email Marketing
However, there are different media of digital marketing. Recently influencers on social media are being used to promote products. This way of promotion is a simple yet intelligent way. Since influencers already have a fan-base or followers, which will be your target market, they can use their voice to talk about your product.
The right marketing strategy will boost sales, but you can reclaim your business start-up costs for the initial period.
Insurance
Depending on your business and the mode of operation, your insurance cost can vary. Liability and property coverage can cost anything around $1200 annually for a small business set-up. Since there is no fixed business liability insurance, here are some risks and their cost that you still need to consider:
- Data Breaches: The recovery of data breaches can cost anything between $36,000 to $50,000.
- Property Damage: Natural disasters or other events might damage your property or equipment, hence disrupting your business.
- Business Liability Insurance: Wrongful termination, sexual harassment charges, or other legal charges can damage the company’s reputation.
- Business Interruption Insurance: Thousands can be lost because of operational disruptions.
- Commercial Auto Insurance: Safeguard your vehicles against theft or accidents.
- Professional Liability Insurance: A successful business today depends on a good reputation.
- Workers Compensation Insurance: Covers the cost of when employees are faced with injuries. Protects the company from litigation. These costs are for when the safety of employees are at risk.
- Environmental & Pollution Liability: When a professional code of ethics is violated, your business may face charges for violating laws on pollution concerns.
- Liability for Injuries or Damage: Your employee can sue your company for personal injury, slander, or other reasons.
Utilities
Utilities may cost anything between $1.5 to $2 per square foot, depending on which state you are in. Some of the services you need to look after are gas, water, internet, electric, and phone bills. It might cost you more if you decide on installing an HVAC unit since there are maintenance and installation charges.
Payroll
A massive chunk of your business start-up cost is dedicated to the payroll of the employees. It is necessary to secure your business’s right talent, but it might come with a price. They may demand more than you have anticipated.
Some employees may start asking for perks, raise, or other payroll benefits. Depending on how valuable they are for the company, you might consider allocating a budget for perks. It will motivate them to work, but fundamentally, like everyone, they also have bills to pay that they cannot sacrifice.
Professional Services
It’s best to hire professionals who will walk you through legal procedures, payroll programs for your employees, taxation, and other procedures you might require while setting up a business. Certified public accountants are professionals that will help you in these while calculating your tax and tax returns.
Depending on your requirement, you can hire them for a full-time or quarterly basis and consult with them on legal procedures. They will review your financial statements and lend financial guidance or advice.
They might even lend you free business or legal advice, which might help you mitigate individual costs. The cost of seeking professional consultancy would vary depending on your need and requirement. However, it’s best to allocate your start-up expense just in case.
Supplies and Improvement Costs
Around 10% of the business start-up cost should be allocated to improvement costs such as furniture, simple renovations, or office supplies. Start-up expenses include water coolers, filling the cabinets, snacks for employees, software updates, microwave, fridge, air conditioning, janitorial services, desk, and chairs.
The sum would depend on the mode of business and the number of employees. Additionally, business dinners, meetings, and birthdays may require you to spend a little and show hospitality to your valuable clients or partners.
Sometimes the employees may request some physical change in the office; for example, they may require a couch or an informal sitting area to take a break and relax.
Traveling
Most business start-up costs do not include travel costs. Traveling cost is variable; it depends solely on choice. Since more meetings are taking place digitally, you do not have to go at length to meet with clients.
Some of the traveling costs include airfare, gas money, train tickets, or other miscellaneous fees such as accommodation or food.
What are some start-up costs that you did not anticipate?
Insurance and liability are some of the main costs that a business start-up cost initially doesn’t include. Although it is easy to maintain a professional environment and protect your employees’ safety, you never know when an employee might sue your company.
Moreover, there are other factors, such as employee payrolls, employee raises, and employee perks. The financial projections are always not accurate. So, if you have stocked up on a substantial amount of inventory or stocks that are not selling, you might need to change your marketing strategy or promotion plan to boost sales.
You might encounter additional advertisement charges to boost sales or promote the services you might not have anticipated.
To conclude, here is a template of the business start-up cost that might help you. However, you can customize your mode of business.
Office Space | $100 to $1200 per employee |
Equipment | $10,000 to $150,000 |
Website | $12 to $40 |
Incorporation and Legal Fees | $25 to $1000 |
Corporation Fees | 21% tax rate |
Inventory | $100 to $1000 or 20% of the budget |
Marketing | $0 to 10% of the budget |
Insurance | $1200 to $36000 |
Utilities | $1.5 to $2 per square feet |
Payroll | 30 to 50 % of the budget |
Supplies and Improvement Costs | 10% of the budget |
Traveling | variable |
Miscellaneous | variable |