Opening a business takes more than choosing a name and renting office space ― it requires careful planning and budgeting. Lack of funding is a primary reason why businesses fail. Fledgling companies often miscalculate how much money is needed to keep a business running daily or don’t budget enough for the various costs associated with getting a business off the ground.
We’ll explain the startup costs every entrepreneur should understand, how to calculate them and how to identify the expenses you should add to your budget.
Startup costs are expenses incurred in the process of starting a new business. You should outline expected startup costs in your business plan. A business plan is essential when launching a business, and writing one should be one of your first steps.
In your business plan, you’ll outline your expected initial startup costs. Be generous and overbudget for them. Unexpected costs will surely pop up, and you don’t want to run out of funds before you get your business off the ground.
Likewise, underestimating expenses falsely increases net profit projections, which could end in disaster for you and your business.
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Miscalculating startup costs is a typical startup mistake. Because every business is different, your exact startup costs will depend on your business’ needs and specifications. For example, a brick-and-mortar store will likely have higher startup costs than an online business and a coffee shop requires different equipment and furniture than a bookstore.
However, the following startup costs apply to most businesses.
Some business owners sometimes hire market research firms to help them conduct a market analysis to assess the industry and market before starting their business. You can save money by doing this step on your own. However, if you hire a research firm, include this cost in your business plan.
Creating any new business requires capital, which is usually acquired in one of two ways: equity financing or debt financing. Debt financing means borrowing money directly, whereas equity financing means selling a stake in your company to receive financial backing.
Most businesses take out small business loans, including Small Business Administration (SBA) loans, from banks or other lenders.
If you take out a loan, calculate the costs of loan payments into your small business budget and ensure payments are made on time.
As you write your business plan, research the business licenses and permits your venture will need. Be sure to include costs for renewing licenses or permits as needed. It’s also crucial to research and factor in small business insurance costs. You should carry some form of insurance to cover yourself, your employees and your business assets from potential liabilities.
Technology is an umbrella category that includes various tech expenses, including creating and maintaining a website, setting up information systems and buying computers. Additionally, some small businesses may outsource their payroll to one of the best payroll services. You may also consider outsourcing your accounting needs to save money or using one of the best accounting software solutions.
Researching budget-friendly tech solutions is wise. For example, you can save on technology costs by building your website. “The cost of building out a website with customized graphics ran me about $1,200,” said Jonathan Mandell, CEO of Teepee. “I primarily used contractors on Upwork and Fiverr.”
Research the best web hosting services to find a partner that can handle your website’s needs, whether you want a simple web presence or a feature-full e-commerce store.
The precise equipment and supplies you’ll need will depend on your business and industry. In your business plan, you should outline a general list of all the equipment and supplies you think you’ll need and whether you plan to lease equipment or buy the necessary items.
Consider involving a professional to ensure all necessary legal documents are in order. A lawyer can help you choose the best legal structure for your business, register for licenses or permits, oversee contracts, minimize risk and liability and more.
“I worked with a law firm that charged me about $500 for incorporating my business and making sure I had the proper documents in order,” said Mandell.
You should start getting the word out about your business so you have customers once you open. Marketing costs include all advertising and promotion costs plus whatever you spend creating a marketing plan.
You may choose to create a marketing strategy on your own or outsource marketing and public relations to an agency. If you do your own marketing, carefully track your spending.
“It’s easy to throw money at Facebook or Google ads and get excited when they bring in customers,” said Alex Willen, founder of Cooper’s Treats. “But you absolutely have to understand how much you’re spending on those ads in order to acquire a customer and how much profit those customers are bringing in.”
Startup costs may be eligible for tax deductions. However, large purchases are not deducted all at once on returns. Many expenses are amortized ― meaning the deduction is spread out over time, usually around 15 years. You must depreciate the cost during this period. For example, if you buy new office equipment, you can list pieces as a tax deduction but must claim depreciated cost.
You can’t take the tax deduction all at once because the IRS categorizes startup costs as capital expenditures. This category is for purchases, such as equipment and vehicles, that the business uses over several years, not in one tax year.
The IRS allows you to deduct $5,000 for startup costs and $5,000 in organizational costs in your first year of operation. However, startup costs cannot exceed $50,000 or else you can’t put the deduction on your tax return. You must file in the same year you opened or submit an amended tax return to reflect the deduction. Amortization is beneficial because you can make the deduction over 15 years. For instance, if your startup costs come to $30,000, you can deduct $2,000 annually from the tax return.
To learn what other tax deductions your business might be eligible for, review IRS Publication 535.
Preparation and careful budgeting are keys to early business success. Understanding your expenses and how you will manage them helps you launch your business successfully and continue to make a profit once your doors are open. By calculating your startup costs, you can:
There are three easy steps to calculating your business startup costs:
If you plan to use your calculations to secure a small business loan or funding, consider creating a clear and easy-to-read formal report of your expected costs. You can also typically deduct one-time expenses for tax purposes, which can save you money.
These tips for estimating your business startup costs can help you manage your startup’s finances and stay afloat as you launch your business. They can also reassure you that turning your great business idea into an actual company is entirely feasible. Just account for every cost while overbudgeting to leave space for emergencies and your new business could get off to exactly the right start.
Max Freedman contributed to this article. Source interviews were conducted for a previous version of this article.