Whether you’re launching a service-based company or a product-based startup, there are certain things you need to take into account to ensure business success and profitability – such as calculating startup costs.
While there’s no magic formula for finding out exactly how much money you’ll need to finance your business, there are some startup costs and additional expenses that are common to most businesses. Adding those costs up will give you a workable estimate of what you need to start your business.
Let’s start by discussing what business startup costs are and go through a step-by-step process on how to calculate them.
What are business startup costs?
Before we dive into what you need to start your business, it’s important to get acquainted with the different types of business startup costs. They can be classified into two main types: one-time costs and recurring costs.
Capital expenses (or capital expenditures) are one-time expenses that are incurred when purchasing fixed assets. These are up-front payments you make when investing in your business to buy, improve, or maintain long-term assets. As a result, you’re able to upgrade the quality and quantity of products and services you can deliver.
Some common examples of capital expenditures are as follows:
- Buildings (plus additional costs that extend the useful lifespan of a building)
- Intangible assets (such as business licensing based on state and federal business laws and patents)
- Property and rent expenditures
- Land (plus the cost of maintaining and upgrading the land)
- Furniture and vehicles
- Inventory and vendor expenses
- Technology expenses (such as computer equipment and software)
Recurring costs (also referred to as operating expenses) are ongoing expenses for running the business. They may contribute to startup costs but are incurred throughout the lifespan of the business. So, you’ll have to set aside funds to cover these expenses during the startup phase.
Here are some of the main recurring costs you need to take into account as a startup:
- Administrative costs
- Office supplies
- Sales and marketing expenses
- Taxes and insurance
You’ll also have to consider operational costs for initial business startups such as licensing, legal, incorporation, and permit fees.
How to calculate startup costs
Here’s how you can find the startup costs of your business:
Step #1: Identify what’s absolutely necessary
When you’re accounting for the above-mentioned startup expenditures, you may notice not all of them apply to your business. For instance, if you’re launching a service-based business, you don’t have to account for shipping and inventory expenses. Similarly, if you’re an online business, you may not need to factor in travel expenditures.
Once you’ve read through the list and figured out all the items that apply to you, determine what expenses are absolutely necessary to streamline your finances. For instance, if you can’t afford to rent space in a building, you might consider working from home.
Step #2: Jot down estimates
After you’ve drafted a complete list of your expenses, assign dollar amount estimates to each item. Keep in mind that these approximate expenses can vary based on your specific business requirements.
When finding approximate costs for your business expenses, consult peers in your field and do online research to make informed guesses about what amount you should allocate for each item. Doing this legwork early in your startup journey will help you come up with a realistic budget plan and devise a workable game plan to launch your business.
Step #3: Determine your break-even point
After you’ve figured out the estimates and have a clear idea about how much funds you’ll need to jumpstart your business and keep it running, you’re now ready to perform a break-even analysis.
Calculating the break-even point enables you to find out how much money you’ll need to cover your business startup expenses and ongoing operating costs. This information will help you make a business plan to ensure your startup remains profitable.
Financing your startup
Now that you understand how much money you’ll need to launch your business, you’ll have to arrange funds to cover the costs.
Here are a few ideas for raising capital for your startup:
- Loans from friends, family members, or a financial institution
- Business credit cards
- Crowdfunding or Kickstarter campaigns
Although there are different ways to finance your business, you should do proper research and consult with your financial advisor for guidance.
While you may have a great business idea, it’s important to take control of your finances before you turn your winning concept into a thriving and profitable business. Calculating startup costs help you understand how much money you’ll need to start your business and keep it running.
Do you have any questions about how to identify one-time or recurring business costs specific to your industry? Let us know!