Starting your own business is very exciting but can be intimidating if it is something you have never done. There are many factors in starting a small business that should be considered before jumping into it, such as cost calculation, profitability, funding, inventory, and many more.
It is very important to figure out the answer to the question — How much money do I need to start my new business? The initial investment for your business can end up being quite large. If you are starting big then you can expect to spend about $30,000. For instance, if you are opening a storage facility and need to rent or buy a location and hire employees, your startup cost will be significant. On the other hand, if you are a small business, such as a home-based nail technician, you will have startup costs, but they will be much lower.
Regardless of the type of business you are running, it will be important to consider different business startup costs prior to officially opening. Continue to read this article if you are interested in learning more about these business startup costs.
How Do I Calculate the Cost of Starting a Business?
Creating a business plan is the best way to get an estimation of what your business startup costs will be. Your business plan should include an estimate of your revenue, profit, and business expenses for the next three to five years.
It’s important to remember that business expenses will remain consistent throughout your journey as an entrepreneur. When running a business a smart rule to follow is to always have enough money to cover 6 months’ worth of expenses. In this regard, you will always have funding in case of emergencies that are expected to happen at one point or another. It is likely you won’t make a profit during the early stages of your new business. Ensure that you have funds saved up to avoid any problems and debt in the future.
There are also additional resources that allow you to visually compare and estimate your startup costs. Websites like SBA.gov provide easy-to-use templates to help you calculate startup costs. Otherwise, continue to read this article for a complete breakdown of startup costs for running your own business. We will cover not only annual cost considerations but also quarterly and monthly expenses such as rent, payroll, office supplies, etc.
13 Business Startup Costs to Consider
When starting up your own business, it would be beneficial to include the following in your business plan:
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- Equipment
- Incorporation fees
- Space and rent
- Inventory
- Marketing
- Website
- Furniture and supplies
- Utilities
- Payroll
- Insurance
- Taxes
- Travel
- Shipping
The above-mentioned list is startup costs for the general small business owner. Costs will vary depending on the type of small business you are running. If you are home-based, your business will most likely require the minimum to start up, like equipment, website, travel, and shipping.
Equipment
If your business requires some type of space to run, you will be spending on equipment. The amount spent on equipment will vary depending on the type of business and its needs. However, the startup costs for equipment typically range between $10,000-125,000.
If you are opening a restaurant, you will need to purchase ovens, stoves, utensils, dishes, soda machines, etc. Alternatively, a graphic designer may only need a laptop, microphone, and software.
Incorporation Fees
Incorporation fees are fees that businesses have to pay once they become active. The fee will vary depending on the type of business and the state the business will be running in. Additionally, you may need to file articles of incorporation or articles of organization and apply for federal or state licensing or permits. Please check with your state about fees and filing. Incorporation fees typically start at $50 and can go as high as $730. However, many states require a $300 fee.
Space
Renting a space or office will likely be the most expensive cost you run into when starting a business, regardless of if you rent or buy. The cost of rent will depend on the area your office is in and if employees are paying rent. For example, if you are opening up a salon, employees will most likely pay rent. On the other hand, if you are a hairdresser that is paying the salon rent, it will be on the lower side when it comes to costs. You can expect rent to range anywhere from $100-$3,000.
Inventory
If you are running a business that involves wholesale, retail, manufacturing, distributing, etc. you will need to determine how inventory will be sold as soon as possible. This can be challenging because as a new business owner, you will not know how much inventory to carry, and when is a good time to restock. You don’t want to have too much inventory because it may be a loss, however, you don’t want to be in a situation where you don’t have enough and risk losing customers.
Because inventory is so challenging to figure out, we recommend allocating between 17%-25% of your budget to inventory. Again, this will depend on the industry you are in as the market will play a huge role in it. When first starting a business, we recommend securing more inventory to test the waters and attract as many customers as possible as well as generate as much revenue as you can within the early stages of your business.
Marketing
Many new business owners do not consider marketing when beginning their new venture. However, it’s important to consider it because you will quickly learn how useful it is, and how often you utilize it. Though you will utilize marketing strategies to spread brand awareness, you should keep marketing costs to a minimum. Fortunately, with the user of social media, this will not be an issue.
There are many marketing materials such as signs, banners, and business cards. Additionally, there are paid ads, social media marketing, and website marketing. Marketing experts recommend keeping marketing costs under 10% of your budget. To begin marketing, start with social media, which is little to no cost, and expand your strategies when necessary.
Website
When running a business, it would be helpful to create a website as this is the number one way customers and clients will find you. Your website should be user-friendly, informational, and professional. Some websites are costly, while others are free, or cost efficient. Consider Wix, Squarespace, and Weebly which have plans that cost between $13-$40 per month.
Furniture and Supplies
When first starting your business, you will start small when it comes to furniture and add to your collection as your business grows. Many businesses require desks, chairs, tables, computers, software, pens, printers, etc. The list goes on. The furniture and supplies you need will vary depending on your business and how many employees and clients are involved. To manage costs, we recommend keeping a budget for furniture and supplies and using only 10% of your total budget.
Utilities
If you are renting a space for your business, you will also need to pay for utilities such as gas, internet, and water. This can be pricey depending on your location, but you can expect to pay $2-$3 per square foot.
Payroll
If you are a business that has employees, the most important task that needs to be done is payroll. Regardless of where your business financially stands, you need to pay your employees. If you aren’t paying your employees on time, your business will go downhill. Not only will you accumulate debt, but you will also lose employees and create a bad reputation for yourself and your business. Payroll consists of the following:
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- Net pay
- Commission
- Overtime pay
- Bonuses
- Paid time off
Payroll will cost you about 25-50% of your budget. Furthermore, you should be considering taxes and insurance.
Insurance
Similar to a house and car, your business will need insurance for protection purposes. There are many different types of business insurance plans. The type of insurance will depend on the needs of your business, the actions of employees, and where your business is located. For example, a nail artist most likely won’t need to consider insurance options, but a construction company will. The average amount you can expect business insurance to cost is about $1,200 per year. Examples of business insurance are:
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- General liability insurance
- Commercial property insurance
- Workers compensation insurance
- Errors and omissions insurance
Taxes
Of course, when running a business you need to pay taxes. When business planning and setting budgets, it can be confusing when trying to figure out how much your business taxes will be each year. This will depend on your revenue, deductible expenses, and business entity. However, corporations pay 21% corporate income tax. Though this is a varying factor of running a business, note a 21% tax rate to be on the safe side.
Travel
Though not every business will need to travel for their business, we recommended considering it just in case another business opportunity arises and requires traveling. For instance, you may be starting an SEO business that does not require you to travel at all. You work from home but are introduced to an opportunity of a lifetime. You are invited to an SEO event where you will network and meet professionals that can significantly further your career. The only downfall is you need to pay for airfare. You don’t want to miss an opportunity like this. Ensure you do have room for traveling if it were to occur.
If you are a business that will be traveling often, do not underestimate how much you will be spending. Consider transportation, food, hotels, and employees who may need to travel alongside you as well. Consider looking into business credit cards that offer travel points and rewards.
Shipping
If you are a retail operating business, you may need to ship your products to customers. This is another startup cost that may require shipping and packaging materials. This can quickly become costly, and both the location you are shipping out of and into will determine the cost of shipping.
Overview
Planning a budget and considering all of the startup costs for your new business can be overwhelming. It’s important to be realistic about costs and consider how much money you will need so you do not run into financial issues in the future. Overestimate the cost so there aren’t any surprises along the way. Additionally, save as much money as you can by getting a business credit card, or taking out a small business loan. Regardless of your decisions, once you commit, do not give up. Follow your business plan, consider your business budget, and watch your business grow.