Calculating startup costs for a new business venture might seem like a daunting task, but with proper planning and organization, it can be efficiently done. Step one involves identifying all the necessary expenses, such as equipment, licenses, permits, and rent. Researching the market and competition is crucial to accurately estimating costs, considering factors like marketing expenses, salaries, and initial inventory. Step two consists of listing all the expected costs and assigning realistic values to each item.
Consulting with professionals, like accountants or industry experts, can provide invaluable insights during this process. By summing up the expenses, one can calculate the total startup costs. Developing a comprehensive and well-researched plan is fundamental for any aspiring entrepreneur to take the first financial steps in a new business venture.
Calculate your business startup costs before you launch
The key to a successful business is preparation. Before your business opens its doors, you’ll have bills to pay. Understanding your expenses will help you launch successfully.
Calculating startup costs helps you:
- Estimate profits
- Conduct a break-even analysis
- Secure loans
- Attract investors
- Save money with tax deductions
Identify your startup expenses
Most businesses fall into one of three categories: brick-and-mortar businesses, online businesses, and service providers. You’ll face different startup expenses depending on your business type.
There are common startup costs you’re likely to have no matter what. Look through the following list, and make sure to add any other expenses that are unique to your business:
- Office space
- Equipment and supplies
- Communications
- Utilities
- Licenses and permits
- Insurance
- Lawyer and accountant
- Inventory
- Employee salaries
- Advertising and marketing
- Market research
- Printed marketing materials
- Making a website
Estimate how much your expenses will cost
Once you have your list of expenses, you can estimate how much they’ll actually cost. This process will be different for each expense you have.
Some expenses will have well-defined costs — permits and licenses tend to have clear, published costs. You might have to estimate other costs that are less certain, like employee salaries. Look online and talk directly to mentors, vendors, and service providers to see what similar companies pay for expenses.
Add up your expenses for a full financial picture
Once you’ve identified your business expenses and how much they’ll cost, you should organize your expenses into one-time expenses and monthly expenses.
One-time expenses are the initial costs needed to start the business. Buying major equipment, hiring a logo designer, and paying for permits, licenses, and fees are generally considered to be one-time expenses. You can typically deduct one-time expenses for tax purposes, which can save you money on the amount of taxes you’ll owe. Make sure to keep track of your expenses and talk to your accountant when it’s time to file your taxes.
Monthly expenses typically include things like salaries, rent, and utility bills. You’ll want to count at least one year of monthly expenses, but counting five years is ideal.
Add up your one-time and monthly expenses to get a good picture of how much capital you’ll need and when you’ll need it.
Determine Your Break-Even Point
Before you fund your business, you must get an idea of your startup costs. To determine these, make a list of all the physical supplies you need, estimate the cost of any professional services you will require, determine the price of any licenses or permits required to operate and calculate the cost of office space or other real estate. Add in the costs of payroll and benefits, if applicable.
Businesses can take years to turn a profit, so it’s better to overestimate the startup costs and have too much money than too little. Many experts recommend having enough cash on hand to cover six months of operating expenses.
When you know how much you need to get started with your business, you need to know the point at which your business makes money. This figure is your break-even point.
Break-even point = Fixed cost ÷ Contribution margin
In contrast, the contribution margin = total sales revenue – cost to make product
For example, let’s say you’re starting a small business that sells miniature birdhouses for fairy gardens. You have determined that it will cost you $500 in startup costs. Your variable costs are $0.40 per birdhouse produced, and you sell them for $1.50 each.
