Deciding to start a business is an incredibly exciting moment, but for new entrepreneurs, that excitement is often accompanied by uncertainty, anxiety, and doubt. Many of these feelings stem from financial worries – not only do you have to worry about whether or not your business will be profitable both in the medium and long-term, but you have to think about the cost of starting a business in the first place.
And business startup costs can get pretty big. You must have to buy equipment, software, sign a lease and hire staff–and those are just the obvious ones. What about licenses and permits, website hosting and business cards?
It is all too piece of cake for gung-ho new business owners to jump into planning without thinking carefully enough about the business startup costs they will need to pay and whether or not those costs are feasible.
Startup costs are expenses for new businesses. Almost all new businesses have at least a few expenses, such as legal entity registration (around $150), software and marketing. Some businesses have costs that are not required but are helpful, such as business plan software ($20 per month), professional consultants and a website ($20 monthly). When estimating the costs of starting a business, it is important to do research to get accurate amounts.
One strategy to get an accurate overall startup cost is to reach out to similar businesses that are not competitors and ask the owner a few questions about costs related to starting their business.
For example, if you are interested in opening a boutique store, find a similar store in another state and reach out to the store’s owner on social media, like LinkedIn. Also, consider calling them or offer to visit their business. Doing this shows that you are serious about opening your own business and will make it more likely that they will talk to you.
Another tip to consider when estimating your business startup costs is to separate ongoing and one-time costs. You should document your ongoing costs within your business plan’s financial projections. For example, a point-of-sale (POS) software and hardware may cost $569 to set up, but the $69 monthly software fee needs to be budgeted for every month.
All businesses need to register their business as a legal entity, also called business structure, with the state it is operating in. Registering as a legal entity protects the business owner’s personal finances if a lawsuit ever occurs against the business. Additionally, making your business as a legal entity protects your personal finances if it goes bankrupt.
The limited liability company (LLC) comes in the category of a popular business entity. Around 80% of small businesses choose to register as an LL C. Business startup costs to register an LL C vary depending on the state in which it’s registered. For example, in Kentucky, the cost to register an LL C is $40 whereas the cost to register an LL C in Massachusetts is $520. Typically, the average cost to register an LL C is around $125.
To register a business, visit your state’s official business registration website. Many business owners find their state’s website to be confusing and cumbersome. An alternative to the state website is an online legal service website. They assist owners in making business registration fast and accurate. Inc File is an online legal service company. They charge $49 plus state fees to register a business and submit paperwork on an owner’s behalf.
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Taxes are easy for a new business owner to overlook. As a general rule, put aside 25% of profits for taxes. For instance, if you predict you will earn $60,000 in profit your first year in business, you will need to put aside $15,000 ($60,000 x 25%). If you are an LL C, you may want to look at the tax advantages of electing an S-corp status. This is when an LL C chooses to be taxed like an S-corp, which can save a small business thousands of dollars in taxes owed.
Additionally, you will want to budget for an accountant or certified public accountant (CPA) to file your business taxes. You can save on this cost if you file your own taxes. However, most business owners choose to have a professional organized and file their taxes.
Business plan software is a tool to help create a strategic plan. It comes with step-by-step directions, educational materials, and financial projection tables. Business plan software can cost from $19 per month to $49 per month. Live Plan is a business plan software that comes with a 60-day free trial. It provides more than 500 business plan examples from which to learn. There are several payment options, including a $140 yearly fee and a monthly fee of $19.95.
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If you are creating a business plan, it is important to show why you believe your business will succeed and support it with data. Use market research tools like Reference USA to gather demographic data about your ideal customers. Reference USA is free at most libraries around the United States. For industry research, use a paid tool like IBIS World, which costs around $1,095 per industry report.
Additionally, many businesses that are seeking funding from investors will purchase a feasibility study, which is an in-depth market research analysis about a business’s likelihood of success. You can purchase a feasibility study from an online source, like Wise Business Plans. Feasibility studies can cost from $5,000 to more than $30,000.
5. Accounting Costs
To manage and record income and expenses, small business owners either have to do it themselves with software like Intuit QuickBooks or hire a bookkeeper. QuickBooks is cloud-based has plenty of online resources to help you learn to use the software yourself. Hiring a bookkeeper may be more costly. However, it will lessen the small business owner’s duties.
If you plan on having several employees, payroll will be an additional cost. If you have an office manager, bookkeeper, or accountant on staff, they may handle the payroll for you. However, many small business owners manage payroll themselves and use software for assistance. Typical payroll software helps set up direct deposit for your employees and can help you pay your quarterly payroll taxes automatically.
Gusto is a payroll software that starts at $39 per month plus $6 per employee. For a business with five employees, that is $69 per month. In addition to payroll, Gusto can also help set up employee benefits like medical, vision, and dental insurance.
In addition to payroll service or software, it is also wise to have enough cash to cover at least two months of employee wages before opening your business. This ensures you can cover payroll costs during any rough patches that may occur after you start your business.
For example, if you have three employees working at any given time, pay them on average $12 an hour and are open 60 hours a week, that equates to approximately $20,000 ($12 x 3 x 60 x 9) you should have on hand. In addition to wages expense, a good rule of thumb for any small business is always to have at least two months of all regular expenses saved in the bank.
If you are opening a brick-and-mortar location, office utilities can add up quickly. For the average business with a physical location, budget $300 to $500 a month for utilities, this may include internet, electricity, water, trash, phone, and cable if you plan on having televisions. Sewage may be an additional cost. However, it is often included with the water bill.
Getting connected with the right provider for your cable, internet and phone service can be complicated. Business Services Connect provides recommendations to available providers based on your business address. It works with all major cable companies, such as Comcast Business, Spectrum Business, and Cox Communications.
Most businesses will have some advertising, whether it is business cards, signage, flyers, or postcards. A business owner may choose to create promotional materials with its names on it like pens, notepads and water bottles. Additionally, a business may advertise in the local print newspapers or trade publications for its industry.
Costs for physical advertising vary depending on the quality and number of products ordered. Paper advertising varies depending on the reach of the publication and quality of the ad.
Typically, a new business will spend at least 5% of their budget on traditional marketing. As your business becomes more well-known, consider dropping that down to 1% or 2%. Many businesses channel all of their marketing budgets to online advertising. Regardless, it is always important to have updated business cards and brochures for face-to-face marketing.
In addition to traditional advertising, many businesses will do online advertising, which includes Google Ads, Facebook Ads, and Instagram Ads. All of these online advertising platforms provide user-friendly options that business owners or employees can manage. The advertising cost for all of these platforms vary greatly based on your industry. A good budget for each platform is $500 each per month.
Instead of managing online ads yourself or having an employee do it, consider paying a professional to manage them. Typically, they charge an upfront setup fee and 10% of the monthly online advertising budget. The average online advertising specialist will want you to spend at least $1,000 per month on a single platform.
The typical office spends, on average, $200 to $1,000 a month on office supplies per employee. These costs go-to items that help employees do their jobs more effectively like paper, ink, writing instruments and furniture. The office supplies cost will increase if you have a business like an attorney’s office that does a lot of printing. Additionally, your office supplies costs go up if you choose to provide additional perks like specialty coffee and snacks.
12. Location Expenses
If you are opening a location, it is important to consider the build-out cost, which is the cost of updating the location to suit your business. A build-out includes both interior design and structural changes. If you sign a long-term lease, say, for three to five years, the landlord may pay for a portion or all of your costs.
Expenses can vary depending on the size of the interior space and type of business. A good rule of thumb is to expect to pay 25% more for the build-out than anticipated due to unknown costs and construction overage.
Your business’ equipment costs need to be factored into the total startup costs. If possible, consider purchasing quality used equipment, which can save you 40% to 60%. If your equipment needs to be maintained, factor that into the monthly or yearly ongoing equipment costs. In case it is a yearly cost, divide it by twelve and factor it in as a monthly expense for the financial projections.
Insurance protects a business owner against liability claims of a third party or employee. A common insurance expense for small businesses is general liability insurance, which protects businesses from injury claims issued by third parties, like customers.
General liability insurance typically costs between $400 and $600 per year. If you have employees, most states require workers’ compensation insurance, which covers a worker injury on the job. Workers’ comp varies by state and the type of work but, on average, it costs about $1.50 per every $100 in payroll.
If you are taking out a loan, including the monthly principal and interest payment. Typically, an unsecured personal business loan may have an interest rate between 11% and 18%. The interest rate of a secured bank business loan that is backed by the Small Business Administration (SBA) is between 7.25% and 9.75%. If you are taking on an investor, they may want monthly payments as a portion of the profit. That needs to be factored in as an ongoing cost. Discuss the method of payment with an investor before agreeing to a deal.
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Stocking your business with sufficient products before opening is important to meeting potential customer demand. To determine how much inventory to keep on hand, consider how much you will sell in a year and keep 1/10 of that number in inventory.
For example, if you expect to sell $35,000 worth of inventory during the year, keep $3,500 ($35,000 x 10%) of on hand. Additionally, if you have a drop-shipping business, which involves selling products produced by a third party, you may not need any inventory or a limited amount.
Although it is hard to know which items will be bestsellers before you open, it is important to have good working relationships with vendors to ensure the timely delivery of fast-selling items. Inventory costs vary depending on the type and size of business. Before opening, call around to get product price quotes from multiple vendors.
When setting up your business, you may need professional consultants to help you in areas where you are not an expert. For example, if you are opening a business that will have several employees, maybe you will hire an HR Consultant to create an employee handbook.
If the overall look, feel, and design of your business’ marketing is important, you may hire a branding consultant. If online security is important to your business, consider hiring a cybersecurity expert. Consultant rates vary by industry and level of experience. Typically, expect to spend anywhere from $75 to $400 an hour for a professional consultant.
Most businesses benefit from taking lifestyle photos of their products or services. Lifestyle photos are action shots of customers using products or using your services. It is important to have these photos before opening a business so that they can be added to online directory pages, social media, website and print media.
For example, if you are opening a clothing boutique, have photographs of customers or models showing off the clothing in your shop. If you have a service business, such as a legal service company, get photographs during a consultation or in court.
You can take free quality photographs on a smartphone. However, they still need to be high-resolution and well-lit. Instead of taking the photos yourself, it is a better decision to hire a photographer to come to your business. Remember, these photos will be seen thousands and possibly hundreds of thousands of times during the next few years on your website and online profiles. An amateur photographer may cost $300 and a mid-tier may cost more than $500 for a photo-shoot in your business.
Most retail businesses will need a point-of-sale (POS) software, which processes credit card payments from customers. Depending on your needs, a POS system can be free, typically with higher processing fees and fewer features, or up to $289 per month for a larger shop. Additionally, many POS software programs provide additional business management features like inventory management and sales analytics.
Vend is a POS software that costs $99 per month for a business with one location. Its software is easy to use and includes 24/7 phone support. You can try Vend for 14 days without entering any payment information.
Every small business needs a website. The cost varies depending on the business’ needs. You can try to design a website yourself with a website builder, which does not require coding. A fine example is Dream Host which provides a WordPress website builder that starts at $19.95 per month.
If you do not want to create the website yourself, you can hire a professional website developer, which can cost from $2,500 to $15,000. If you are going to hire a professional, you may want to purchase a domain name and secure it before someone else does. Additionally, web hosting (space on the web you will use to store your website’s information) is a common cost small business owners incur before hiring a professional designer.
Before opening your business, budget for travel costs to attend places like trade shows and conferences as well as to visit suppliers and vendors. It is important to have good working relationships with the people you’re getting products from or peers within your industry.
When traveling to events, consider costs like registration fees, airline fare, rental car, hotel, and meals. Best book for booking airlines, trade shows, and conferences with at least six months in advance to get a discount.
For example, many business owners getting supplies from China will visit the factory to create a better relationship with the factory owner and manager. It is especially helpful to have good working relationships with vendors and suppliers if you have a situation where you run out of inventory and need the factory to rearrange priorities for your business. For a business trip to visit a Chinese factory, budget at least $4,500.
Understanding startup costs before starting your business is important to know so that you do not run out of capital. You do not want to be in a situation where you are going back to the bank or investors for additional funds before you have any customers. It is helpful to document each startup cost in a business plan to show you have created a thorough plan to determine the funds needed to open your business.