What You Need To Know Before Starting A Business
Starting a business can be scary and yet exciting at the same time. All new business owners are constantly worried about costs, securing loans and the business's success. Things like office rent, payroll, business tax have to be considered before starting a business. And these things start to add up very quickly. A survey conducted by Kauffman Foundations shows that the average cost to start a business is approximately $30,000 and it increases every year.
Some types of businesses like micro businesses and home-based businesses have lower startup costs. We have put together a list of easy ways to cut down on your initial business costs when launching your company. Plus, we have also explained how to calculate your costs.
How To Calculate The Cost Of Starting A Business
The best way to estimate your business startup cost is through your business plan. It would be best to have financial projections that should estimate your profit, loss, expenses and revenue. And imagine that too for the next three to five years!
A Forbes article talks about the hidden costs when starting a business that have to be accounted for when calculating startup costs. These projections will help you estimate how much money you will require from investors for the capital.
Many costs that you will encounter and that we have listed are recurring. These include office supplies, rent, salaries etc. These are costs that must be paid monthly, quarterly or annually unlike other one-time costs.
The general principle when calculating business expenses is that you should cover six months' worth upfront. Hence, it's not a smart idea to rely on your revenue to cover your costs initially. You never know how your business will perform in the start so you should have something to fall back on just in case.
“It's not a smart idea to rely on your revenue to cover your costs initially”
Top 14 Small Business Startup Costs That Most Business Owners Fail To Plan For:
The equipment costs can fall anywhere between $10,000 and $125,000 depending on the size of your business and what industry you're in. If you’re an ecommerce business, you’ll likely not have equipment, however, costs will add up when you take into account software-as-a-service (SaaS).
2. Incorporation fees
One of the first things you have to do when setting up a business is choosing a business entity. Whether you decide to form a limited liability company or a corporation you will have to file the necessary documents with your state. This filing fee can be as low as $50 or as high as $725. If you’re most interested in anonymity when incorporating your business, Delaware and New Mexico are two states that both respect the privacy of its incorporators and their small businesses. Keep in mind that if you operate a business in California, but are incorporated in what is referred to as a foreign state, you’ll likely need to pay income tax in both states on any revenue collected both within and outside the state. Check with your income tax professional to determine.
3. Office space
One of your largest expenses will be your rent whether it is an office or retail space. Depending on the size and type of space that you're using you may spend around $100 to $1000 per employee per month. Given the lasting effects of COVID, you may notice landlords offering more concessions than they had prior to the Pandemic. You may notice that lower rents are available, but that they are offered as rent abatement (free rent) and more flexibility when it comes to sub-letting or early termination. Additionally, it’s wise to ask that no personal guaranty be required.
Regardless of what industry you're in you might need to acquire inventory which you will go on to sell. But knowing how much inventory you have to carry is tricky and the ideal solution is to spend around 17 to 25% of your budget on inventory. If you’re an Amazon store, you may want to review their supplier requirements to ensure your small business is in compliance with their best practices.
Marketing is essential for any new business however it can be expensive. Printing signs and banners or paid ads do end up being heavy on the wallet. Highly regarded CEOs suggest spending a maximum of 10% of your budget on marketing. This is easy keeping in mind today’s social media influence. Many small business owners are turning to agencies that provide access to and management of social media influencers on TikTok, Instagram, Facebook and Youtube.
You'll want a professional looking and easy to navigate display for your website. Luckily many services exist that make creating a website easy and affordable. This should cost you around $40 per month. Many templates exist, so depending on your industry it may be worthwhile to check out Wix or Themeforest before committing to building a website from scratch
7. Furniture And Supplies
Furniture should be a one-time expense while the supplies are a recurring cost. Once again this varies depending on the size and industry of your business. However, the general rule of thumb is that it should never be more than 10% of your budget. Given the amount of businesses that have shuttered during and following COVID, it’s advisable to check with used furniture suppliers and websites like Craigslist and OfferUp.
Paying for rent is not enough but there are also electricity, gas, water and other costs to think of. The average amount that business owners spend is approximately $2 per square foot of office space.
Before you start earning revenue you have to think about your payroll. Your payroll will include bonuses, overtime pay, commissions, net salaries etc. Most banks offer payroll service, but they can be expensive and less robust when compared to standalone payroll companies or technology companies that offer a more holistic suite of small business payroll services. Square offers unique and cost-effective payroll options for both new businesses and existing small businesses looking for an easy-to-manage payroll solution for both owners and their employees.
10. Professional Consultants
It is tempting to cut costs by doing things yourself but working with professionals can be worth the additional cost. You don't have to hire someone full-time however you can hire part time when the need arises. Small businesses usually end up spending $1000-$5000.
It is important to invest in an insurance plan to protect your business from any harm whether civil, criminal or accidental issues. These can cost around $1200 per year.
While taxes depend on the amount of revenue you generate, they may be hard to predict as initially it is important to allocate some. Under federal law corporations pay a flat 21% income tax.
Not every business owner has to travel for their business. However, if you have to meet a client or you travel a lot it is important to allocate certain funds for that. And if you keep these expenses to a minimum, you can use your revenue for other bigger expenses.
Shipping will usually only apply to retail businesses especially those that are based online. Depending on what you're shipping these costs can come up to thousands of dollars.
“There are ways to cut down on how much you spend”
How To Save On Startup Costs
Many expenses you make while starting a new business are non-negotiable and they add up quickly. But there are ways to cut down on how much you spend. Here are some simple ways to help you avoid spending extra on unnecessary things.
Do Your Research
Before spending a large sum on expensive purchases just do some research and you may find that there are cheaper options. For example, just using an office sharing space rather than renting an entire office may prove to be more cost effective. But some things are worth the investment. Buying cheaper equipment for example. It may be cheaper initially however the repair and replacement costs will end up costing you more than what you would have spent initially.
After calculating your startup costs you might be overwhelmed. There are plenty of ways to secure a business loan. Here is a list of the best lenders where you can check if you qualify for any small business loans. It may be difficult to find an investor willing to work with startups, and the downside is that you’ll likely need to offer equity in exchange for their investment in your small business.
Get A Business Credit Card
After failing to secure a business loan you can try applying for a business credit card instead. Business credit cards are easier to apply for and you have a higher limit than a personal card. Make sure you never max out your credit limit or spend more than you can afford. If you do so it will harm your credit score and eventually hurt your chances of getting a small business loan later.
One of the most stressful parts of starting a new business is planning your budget. However, knowing how to cut costs and prioritizing certain expenses can go a long way in maintaining your budget.