Are you thinking about starting your own business? The first thing you have to think about is definitely capital – becoming an entrepreneur is always a move in the right direction, but you have to plan your budget carefully and forecast the start-up costs. Ideally you will start with a small-scale business, so you can prove yourself as a business owner by starting by generating enough cash flow to sustain and manage your business. For example, if your main goal as an entrepreneur is to open a restaurant, open a food truck first, to generate enough profit to save for a future full-scale business.
It’s important to keep in mind that in order to start any business you have to first understand the costs specific to your venture. If you’re able to estimate these costs, you’ll also be able to determine the financing options available, or even find out that you have enough personal capital to start a business; find out what it’ll take you to reach break even point (when you’ll start making a profit); and help you manage cash flow once the business is up and running.
Understanding start-up costs
Start-up costs are the costs you’ll have before making an income. These can be broken down in expenses (costs involved in the preparation to open a business) and capital expenditures (one-time costs to purchase assets).
The exact costs depend on your specific business and industry, but we’ve estimated an approximate number to each of the costs you have to plan for, so you can get a sense of what your total start-up costs will look like.
Equipment
These costs can range between $10,000-125,000 depending on your business type and size. For example, if you’re opening a restaurant you’ll need ovens, stoves, and cooking utensils; but if you’re opening a hair salon you’ll need styling chairs. Plus, for most businesses you’ll always need at least one computer.
Licenses and permits
These costs can go up to $500 depending on the city or state your business is located in. Some businesses may require a general business license to operate, but all businesses have to abide to state and local government licenses – the costs vary here. Plus, you might also require a professional license in order to work in your area of your expertise. And if your business requires building a structure, you’ll also need a building or construction permit, to ensure that this new structure abides by local and state ordinances – this can take these costs up to thousands.
Office space
These costs will be a big part of your fixed costs, whether you rent or buy the space. You should estimate a monthly cost of $100-1,000 per employee, depending on the type of space you acquire and the benefits your business provides. Remember to add to that cost a rough $2 per square foot of office space for utility bills such as electricity and internet, which you will also need pay on a monthly basis. In the beginning, you can try mitigating these costs by either working from home, renting a coworking space, or travelling directly to clients – depending on the service you sell.
Website
If you only need to build a common company website, where customers can find more information about the brand, location and opening times, you can probably do this yourself by using a free website template. The fixed cost here will be your domain registration and the website plan you choose, which can cost up to $25/month.
If your business is online only, or if you want to pair a physical store with an online store, you’ll need to invest more on an eCommerce site. Hiring someone to set this up for you can cost between $1,000-5,000 depending on complexity. Plus, if you’re selling online, you’ll want to have different payment options available to your customers, in order to offer a flexible shopping experience that can ultimately increase your customer retention rate. By flexible, we mean accepting credit card payments – this will definitely benefit your sales, but will also increase your eCommerce site costs, as you will have to choose a payment gateway provider and make sure your site follows all the rules in the PCI Compliance guide, so you can guarantee the security of your customers’ data.
Inventory
If you’re providing a service, these costs might not apply, but if you’re business is in retail, wholesale, manufacturing or distribution, you’ll definitely need to have an inventory setup in order to sell. If so, you should set aside 17-25% of your budget for inventory. Bear in mind you need to balance your inventory: if you have too much you risk spoilage, but if you have too little you risk losing customers. It’s advisable to invest on a high number of inventory in the beginning, as you’re building brand awareness and relationships with your audience, so turning down a sale due to lack of stock is not ideal.
Marketing
Up to 10% of your startup budget should go to marketing. You can choose from different marketing materials, depending on your business type and the audience you’re targeting. From signs and banners to paid social media adverts and giveaways, you can easily control the amount you spend in marketing your business by picking the right options to fit your budget and engagement goals. And if in the beginning you need to cut your costs somewhere, the easiest cost to cut is probably marketing – nowadays you can start marketing your business on social media, by setting up free brand accounts in different platforms and relying on the digital form of “word of mouth”.
Payroll
If you have employees, you need to pay them (including yourself!). Payroll costs should be around 25-50% of your total budget, and besides salary, these include benefits and compensations such as bonuses and overtime pay. And remember that these costs are likely to change as your business grows and you hire more employees. In an ideal business, payroll should cost you only up to 25% of your total budget, but this will highly depend on your business type and size, and if you’re a sole proprietor or not.
Now that you understand all the different costs you need to account for when setting up a business, you just need to make calculations based on our estimates and find exactly how much money you need to start your entrepreneurial journey.