Essential Startup Costs: A Guide for New Small Business Owners
Launching even a small business requires proper financial planning. The fact is, some entrepreneurs start a small business with a dream and a tight budget. We'll get to the truth: the startup costs will be some of the highest expenses you'll have to face. Hence, figuring it out might feel like a crash course in business finance.
Well, this doesn't mean that it should be overwhelming either.
In this guide, you will get the essential startup costs to ensure a healthy business launch.
Startup Costs: What Are They?
First things first, what are startup costs, actually, and why do they important? Startup costs are initial expenses you’ll need to launch and operate a new business. They show exactly how much capital you need before opening day.
Understanding startup costs is essential to accurately estimating the sum amount of capital requirements. Moreover, it helps you determine if your business is financially feasible. As a result, it avoids early business failure due to a lack of funds.
Categories of Startup Expenses
Basically, business startup expenses fall into three main categories.
What are they?
One-Time Costs
These are one-time costs necessary for the legal and physical setup of your business. These costs should be estimated for up to $5,000 for tax purposes..
Licenses: Depending on your industry and region, licenses and permits can cost $50 to $1,000
Registration costs: Prepare $50 to $500 for LLC or Corporation filing fees.
Tools & equipment: Prepare the startup costs around $2,000 to more than $100,000 for equipment and machinery
Branding: Creating a unique brand’s logo for your business will cost around $500 to $3,000.
Website: Need an official website? Prepare around $2,000 to $10,000 for website development.
Repeated Costs
These costs keep a business running. For a small business operation, you will need around $3,000 to $15,000 a month in the first year of launching.
Direct vs. Indirect Cost: Cost of Production vs. Overhead
Breaking down your expenses into categories related to your product makes it easier to set your pricing.
Direct costs are directly associated with your business.
Staffing and Management
Don't panic; but hiring can be expensive for new businesses. This is why most small businesses in the US are run by solo owners. Amongst those small business owners, only 16% of them have more than 20 staff.
Here’s the scoop: if you’re planning to hire some staff, include more than just hourly pay.
Why?
Average cost: The average cost for a non-government worker in the US ranges from $46.14 per hour.
Retail workers wages: The average hourly pay you’ll have to spend for retail staff is around $17.64.
Packaging: Your products will need to be packaged. Therefore, product packaging should be in the list, too. For example, if you’re starting a candle business, the costs of custom candle boxes depend on the material, size, and printing you need for the boxes.
In brief, direct costs help you set your retail price. Meanwhile, indirect costs help you determine how many products you must sell to break even.
Fixed vs. Variable Costs: Stability vs. Change
Even fixed expenses can vary. Understanding this difference will allow you to better budget your expenses.
Fixed Costs
As the name suggests, fixed costs mean the consistent cost you should spend every month.
Rent: Renting a co-working space can cost you between $200 to over $5,000 monthly. Many early-stage entrepreneurs reduce expenses by operating from a home office, especially during the first year of launching.
Variable Costs
Variable costs are more unpredictable. These costs change depending upon demand and supply chain disruptions.
Inventory: Your first purchases of inventory for products normally run from $2,000 to $20,000+.
Utility bills: The average monthly expenses for gas, electricity, water, internet, and telephone bills might range around $430-$750.
Point of Sale (POS)
Most retailers require a good point-of-sale system to conduct their business. This system should include your stock and your customer loyalty program. Today’s customers like convenience. If you have an online business, you should invest in a good digital ordering system. Another option you should look into for your business is self-service checkout or "scan and pay" applications.
Unexpected Costs & Contingency
Well, no plan is perfect, afterall. Thus, you should expect the unexpected costs that might disrupt cash flow, such as:
The Shipping: Large or heavy products significantly increase delivery costs. Returns can also multiply these expenses quickly.
Professional expertise: Some experts might charge $150 to $1,500 per hour to guide your new business.
Don’t forget to save some for the surprise expenses like equipment failures or supply chain disruptions.
How to tackle these unexpected costs? Rule of thumb: Add 10–20% to your total startup budget as a contingency fund.
Here, you should manage (and maintain) a cash reserve of 3 to 6 months of operating expenses. Securing a business line of credit can also provide a safety net. To better understand your financial standing and future potential while planning ahead, it may also be helpful to get a Free Business Valuation as part of your overall financial strategy.
How to Handle New Business Startup Costs?
If you think that your personal savings aren't enough, consider taking from modern funding sources.
For example:
Venture Capital: You’ll get expert advice for high-growth, but must give up some equity in your company.
Crowdfunding: Crowdfunding lets you raise money without debt.
Business credit cards: Credit cards are great for initial supplies. However, you should avoid high-interest debt that can become unmanageable.
Planning the Costs for Long-Term Business Success
Starting a business is somewhat like a marathon. Most founders don't see high profits in their first year.
What to do here?
Prepare a long-term budget: Aim your budget for at least 18 to 24 months of cash.
Reinvestment: Early revenue often goes straight back into the company; consider this as your reinvestment.
Remember, preparing your startup costs is the key to long-term business success. Done properly, you ensure your business survives the startup phase. And of course, it will thrive for years to come.
The Takeaway
Undoubtedly, we must say that proper financial planning determines the success of your new business. Hopefully, the essential startup costs we revealed above help you launch your small business.
Have a successful launch!
