There's more to a business than furnishings and office rental. Especially in the early stages, startup costs require careful planning and meticulous accounting. Many new businesses neglect this process, instead relying on a flood of customers to keep the operation afloat – usually with abysmal results.
Planning Before the Launch
Essential to the startup effort is the creation of a business plan – a detailed map of the new business to be created. A business plan forces consideration of the different startup costs for the business. Underestimating expenses will falsely increase expected net profit, a situation that does not bode well for any small business owner.
Startup costs are the expenses incurred during the process of creating a new business. All businesses are different, and can require different types of startup costs. Online businesses have different needs than brick-and-mortars; coffee shops have different requirements than book stores do.
However, there are a few generic costs that are common to all business types:
- Research expenses
- Insurance, license and permit fees
- Equipment and supplies
- Advertising and promotion
- Borrowing costs
- Employee expenses
- Technological expenses
1. Research Expenses
Careful research of the industry and consumer makeup must be conducted before starting up a business. Some business owners choose to hire market research firms to aid them in the assessment process. For business owners who choose to follow this route, market research fees and expenses must be considered in the business plan.
2. Insurance, License and Permit Fees
In most areas, businesses are expected to submit to health inspections and authorizations and obtain certain business licenses and permits. Some businesses might require basic licenses while others need industry-specific permits. (To obtain a federal business license and to find out more about your state's business permit requirements, see Business Licenses and Permits.)
3. Equipment and Supplies
Every business type requires some form of equipment and basic supplies. Before adding equipment expense to the list of startup costs, a decision has to be made: to lease, or to buy. The state of finances will play a major part in this decision. Even if you have enough money to buy equipment, unavoidable expenses may make leasing (with the intention to buy at a later date) a viable option. However, it is important to remember that, regardless of the cash position, a lease may not always be best, depending on the type of equipment to be leased and the terms of the lease.
4. Advertising and Promotion
A new company or startup business does not promote itself. However, advertising and promoting the business is much more than ad placement. It also includes marketing - everything a company does in order to attract clients to the business. Again, external companies are often used in this process, as marketing has become such a science that any advantage is beneficial. (To learn more, read Tips For Boosting Your Business.)
5. Borrowing costs
Starting up any kind of business requires an infusion of capital. There are two ways to acquire capital for a business: equity financing and debt financing. Usually, equity financing entails the issuance of stocks, but this does not apply to most small businesses, which are proprietorships. For small business owners, the most likely source of financing is debt that comes in the form of a small business loan. Business owners can often get loans from banks, savings institutions and the U.S.Small Business Administration (SBA). Like any other loan, business loans are accompanied by interest payments. These payments must be planned for when starting a business, as the cost of default is very high.
6. Employee Expenses
Businesses planning to hire employees must plan for wages, salaries and benefits (if offered). Failure to compensate employees adequately can end in low morale, mutiny and bad publicity, all of which can be disastrous to a company.
7. Technological Expenses
Technological expenses include the cost of a website, information systems and software (including accounting and payroll software) for a business. Some small business owners choose to outsource these functions to other companies in order to save money.
Cash on Hand
It is always a good idea to have some extra money set apart for any overlooked or unexpected expenses. Most big companies fail because they are not liquid enough or lack the cash to deal with unexpected problems during the business season.
Sole Proprietorships and Partnerships
It is important to note that the startup costs for a sole proprietorship will differ from the startup costs for a partnership or corporation. Some additional costs that will be incurred by a partnership include the legal cost of drafting a partnership agreements and state registration fees. Other costs that will be incurred by a corporation include fees for filing articles of incorporation and bylaws and terms of original stock certificates.
The Bottom Line
Launching a new business can be an invigorating experience. However, getting caught up in the excitement and neglecting the details can often lead to failure. Above anything else, observe and consult with others who have traveled this road before - you never know where the best business advice will come from.
For further reading about starting your own business, see Starting Your Own Small Business.