The Cost to Start a Business

This is one of the most frequently asked questions in starting a new business, and one that people often get wrong by underestimating the answer.

That may not be a problem, if there is plenty of cash in reserve and sales pick up quickly, or it may be a devastating problem if there was very little reserve, the estimate was way off, or sales are much slower than expected in taking off.

Because many business owners have no experience in financial matters, however, it may seem like a difficult task to accurately figure out the cost to start a business. It doesn’t have to be, however.

It is actually quite easy to make a very accurate estimate of the costs to start and run virtually any business to the breakeven point. Most business owners don’t bother, because they either feel like they already know or they just aren’t focused on the details. And if you are starting something on the side with just a laptop, and it’s a service business, then you are probably fine not to worry.

On the other hand, if you are starting something with monthly fixed costs that you have to commit to for a reasonably long period, you better do the math or  you may find yourself in a very bad position.

I’ve had clients who started with well under $500 and others who sunk over seven figures into their businesses. The amount has a lot less to do with the success than the business itself and the related business experience of the owners themselves. My general advice- don’t start a high fixed cost business you have no experience in (hello, restaurant dreamers!).

On the flip side, try all the sub $500 investment ideas you want- eventually you will find the right mix of need and opportunity and USP and you will be on your way. If not, then maybe you weren’t cut out to be an entrepreneur, but at least you didn’t blow your life savings and go into debt to find out.

Here are the main cost considerations of starting a new business, some, none or all of which may apply, depending on the business:

Lease
This includes not only the monthly payments, from the time of taking the keys, but also a deposit that may be required, which could run anywhere from a few hundred dollars to several months worth of payments.

Leasehold Improvement
Once you have the space, you may need to make changes to the interior, including adding or removing walls, rewiring, replumbing, adding finishes, lighting, shelving, fixtures, etc. to make the space into your actual business.

Equipment and Vehicles
Depending on the business, you will need to buy or lease the necessary equipment to operate it. Don’t forget the small things, like fax machines, phone systems, computers, desk chairs, filing cabinets, etc. which nearly every type of business needs, and although no one item costs a lot, the collection will add up.

Inventory
This is includes all the products you will stock for sale on your opening day. Depending on the terms you can get with your suppliers, you may be able to finance some or all of this expense. Being a new business, however, getting good terms right from the start will be more difficult and depend on your good credit and business experience and to some extent your industry knowledge and contacts.

Staffing
You may start your business alone or with only partners, but if you need more help then you will have the cost of employees. Unless you pay them illegally, you will also have the added expense of payroll taxes, social security, etc. which adds an additional $.20 or more cents to every dollar of payroll cost.

Marketing/Advertising
You will have to spend money on whatever form of advertising you choose to do for your new business. You might be doing a mailing, put up a website, buy a sign for the front of your location, or even do radio spots, trade journal ads, Facebook ads or any of a variety of other options. Most of these expenses will be incurred before the advertising actually takes place, which means they can’t be paid out of the revenue they generate.

Insurance
There are several types you will need, depending on the size and type of your business. Generally you can pay in installments, which helps lower the startup cost.

Printing
Virtually every business requires some printing. This may be as little as business cards, or it may be much more.

Utilities and Deposits
You will need to turn on the electricity, phone, internet and any other services you need to operate. Some of these will require a deposit or hook up fee, or both, that will make the first payments double or more what a typical payment will be.

Permits/Licenses/Taxes
While not usually an excessive amount, you will need to budget some money to cover your business license, and any other permits or taxes you will be required to pay. Some states require a deposit for your sales taxes. If you incorporate or form an LLC, there may be fees and taxes associated with the formation.

Professional Services
If you use a lawyer, accountant or other professional services in getting started, there will be costs associated with their services. Most businesses can avoid these expenses, at least initially unless there is a complicated investor relationship or partnership agreement needed, although having a bookkeeper for all but the very smallest businesses is usually a very worthwhile investment.

Other Costs
All businesses have a few extra costs that are unique to their operations. By investigating your business thoroughly you should be able to uncover these and be able to accurately estimate how much they will cost your business when you get started.