How to estimate realistic business startup costs
Estimating your startup costs gets you one step closer to realizing your vision.
We see a growing number of new businesses each year. In 2020, 804,398 US businesses were less than a year old.
Most businesses start with great ideas. But, not everyone immediately has the resources at hand to launch it.
Before jumping into a new venture, you’ll need to calculate your startup costs. This is the amount you need to raise to ensure that your business survives its early stages.
We’ve drawn up a game plan on how you could get a reasonable estimate of your startup costs. This includes a list of specific things you need to set aside some money for.
Draft a Financial Plan
Before calculating how much money you need, you have to draft a financial plan first. It involves developing both short and long-term goals for your business.
It’s an essential element of your business plan. It will help you set realistic expectations. It forces you to look at the current state of your finances and to act from there.
A look into your current financial situation can aid you in decision-making. It gives you the information you need to make more sound and logical choices for your startup.
The process could involve a bit of accounting and market research. You’ll have to draft a few income statements and sales projections. It’s a lot of work, but it will end some guesswork when calculating your startup estimate.
Business Startup Costs You Should Consider
Once you’ve set your business expectations, you can start estimating your startup costs. You can divide these into one-time expenses and ongoing expenses. It’s best to be as detailed as possible so you can get more accurate estimates.
- Permits and Licenses. Every legal business needs government permits before beginning its operations. They certify your business as legitimate and ensure that you’re not in any trouble with the law.
- Incorporation Fees. You might decide to incorporate or form a limited liability company (LLC). If you do, you will need to file articles of incorporation or articles of organization. The fees will depend on your state of choice, but it usually won’t go over $300. Try to look up forming a Wyoming vs. Delaware LLC and see which one suits your needs better.
- Equipment. Expenses for equipment can vary depending on the industry. Requiring specialized equipment may lead to higher spending. If your business is in manufacturing, you may need to set aside a more significant amount for this.
- Branding. Branding includes your business logo and graphic design. You can hire a designer to give you an asset pack that you can use and reuse throughout your business’ run. This can be a one-time thing. You can also opt for a rebrand but only when necessary.
- Real Estate. If you don’t have your own property, you’ll have to spend on a downpayment on your preferred location. Sometimes, renovations are also necessary to turn it into a suitable business space. The cost can vary according to location, size, and extent of the renovations.
- Rent. If the business property isn’t yours, these will be your monthly payments for the use of the location. You often settle the amount with a contract with the landlord before moving in.
- Payroll. Even during your business’s early stages, you have to pay your employees a living wage. You can calculate this according to the nature of their work and their working hours. You can also look at other companies with the same role and use it as a reference.
- Business Taxes. State and local tax obligations may differ. But, the US federal government imposes a 21% corporate tax on business profits.
- Business Insurance. To keep your assets safe, business insurance is necessary. You should take care to cover your property, possible lawsuits, workers’ compensation, etc.
- Legal Services. Every business requires legal advice and services. Lawyers provide valuable advice, especially on business agreements. You need their expertise when drawing up contracts and other paperwork. They can also protect you from making any significant legal missteps. Legal fees can vary from lawyer to lawyer, but you can expect to spend a few thousand per year.
- Marketing. When you’re only starting, you don’t have to put that much cash into your marketing yet. Marketing expenses can involve running print, TV, radio, or online ads and sponsorships. Nowadays, social media is a new entrepreneur’s best friend.
Making Your Estimate
Once you’ve built a good picture of your expenses, you can begin your estimations.
Since it is an estimate, it does need a bit of guesswork. But given the expense information we have and some market research, we can arrive at a rough figure.
Some people advise covering at least six or twelve months’ worth of expenses. You can do that, but there is no standard yet for making startup estimates.
If you want a more comprehensive estimate, you can incorporate your projected profits.
Entrepreneur Tim Berry suggests estimating your expected sales for 12 months. From this figure, you can subtract 12 months’ worth of expenses. The final figure will show you whether you have enough funds or not.
The Bottom Line
Estimating your startup costs gets you one step closer to realizing your vision. It grounds your expectations and emphasizes points for improvement. It also helps you translate your vision effectively and attract potential investors.