How to Calculate Startup Costs for Small Businesses
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When you’re writing your business plan, you’ll need an accurate estimate of what it will cost for you to start your business so you can decide how to manage your funding and expenses.
Accurately estimating your startup costs can be tricky, but this guide will help you understand your initial costs and how you can plan for them.
First we’ll look at some of the most common startup expenses to get you started:
Common business expenses
The first step is to make a list of all the purchases you’ll need to make in order to start operating.
Categorize your list into expenses that are one-time purchases and those that will be ongoing payments, since both will factor into your calculations.
Here are some of the most common expenses in both categories:
Necessary equipment like a cash registers, machinery, or vehicles
Permits and licenses, such as city, county, and state licensing, or those related to your specific industry
Computer or technology equipment
Down payment for your office or store
Initial business cards
Initial office supplies
Technology, such as computers, tablets, or printers
Office or business furniture
Your rent or mortgage payment
Payroll and employee benefits
Your salary and benefits
Operating expenses, such as bags in retail
Office supplies, such as pens and paper
Website hosting and maintenance
Travel if your business will require it, including gas
Utilities like electric, gas, water, phone, and internet
Ongoing office supplies
Loan or credit payments
Next, you’ll also need to determine which of your ongoing expenses are fixed costs, and which are variable costs. Fixed expenses you can plan for exactly, but for variable expenses, your costs will change each time.
Here are some common expenses in each category:
Lease or mortgage
When planning for your startup, you need to only consider items that are essential in the beginning, rather than optional items you can invest in later when your business revenue can help offset the cost.
Don’t forget to research additional necessary expenses in your industry. Other professionals in your field or websites about your type of business can help you determine what is essential.
How to calculate startup costs for your small business
Use your list from above to complete the next steps:
After you’ve made a list of your expenses, it’s time to research. You’ll need to estimate the cost of each item on your list for an accurate estimate.
When researching, don’t forget to do some bargain hunting. You’ll want to minimize expenses as much as possible without sacrificing quality for big-ticket items. This will mean that your research will include equipment capabilities, reviews, maintenance costs, and warranties.
Your one-time expenses and fixed ongoing expenses should have specific costs you can estimate fairly accurately.
For variable ongoing expenses, you may have to do some extra research and make some broad guesses. For example, you won’t know what your ongoing inventory costs will be until you’re operational, but if you factor in a bit of cushion on these expenses, you can ensure you’ll have enough funding to cover these expenses.
2. Expense totals
You’ll need to total your one-time expenses, so that you know exactly what just opening the business will cost, but that isn’t all. You’ll also need to factor in several months’ worth of ongoing expenses.
While your business will be able to cover these expenses once it is operational, it may take time before it can generate enough sales to cover these costs, much less make a profit.
Generally speaking, it’s a smart idea to count on covering six-12 months of business expenses up front while your business is growing. While you can factor sales growth and business revenue into the payment for these costs to lessen the upfront burden, it’s generally safer to make calculations on the assumption that your business won’t be able to contribute, since you won’t be able to accurately forecast sales until you’re operational.
You may also find that some expenses will increase as your business grows, such as marketing, inventory, or payroll, so you’ll want to factor in some extra cushion for growing needs.
4. Total startup costs
Once you have all these figures, you can total your expenses to estimate your startup costs fairly accurately.
Yes, it’s probably a large number, especially if you plan to factor in a cushion for the first few months to a year of operation, but there are many funding options for new business owners.
Once your business begins operating or you begin making purchases for your business, you may find additional needs you left out of your estimates or that some expenses are lower than you planned. You’ll need to keep adjusting your plan as you learn more through the process of starting your business.
This article originally appeared on JustBusiness, a subsidiary of NerdWallet.