There's more to a business than furnishings and office space. Especially in the early stages, startup costs require careful planning and meticulous accounting. Many new businesses neglect this process, relying instead on a flood of customers to keep the operation afloat, usually with abysmal results. In this article, we'll look at how to estimate your startup costs and plan ahead to position yourself for success.
The Business Plan
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, so they require different types of startup costs. Online businesses have different needs than brick-and-mortars; coffee shops have different requirements than bookstores do. However, there are a few expenses that are common to all business types:
- Advertising and promotion
- Borrowing costs
- Employee expenses
- Equipment and supplies
- Insurance, license, and permit fees
- Research expenses
- Technological expenses
We'll look at each of these in turn.
Advertising and Promotion
A new company or startup business will never succeed without promoting itself. However, promoting a business is much more than placing ads in a local newspaper. 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, because marketing has become such a science that any advantage is beneficial.
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 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.
Businesses planning to hire employees must plan for wages, salaries, and benefits, also known as cost of labor. Failure to compensate employees adequately can end in low morale, mutiny, and bad publicity, all of which can be disastrous to a company.
Equipment and Supplies
Every business requires some form of equipment and basic supplies. Before adding equipment expenses to the list of startup costs, a decision has to be made to lease or buy. The state of your finances will play a major part in this decision. 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 and terms of the lease.
Insurance, License, and Permit Fees
Many 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. Carrying insurance to cover your employees, customers, business assets and yourself can help protect your personal assets from any liabilities that may arise.
Careful research of the industry and consumer makeup must be conducted before starting 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, the expense of hiring these experts must be included in the business plan.
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 to save on payroll and benefits.
Additional Considerations on Startup Costs
It is always a good idea to have some extra money set aside for any overlooked or unexpected expenses. Most big companies fail because they lack the cash to deal with unexpected problems during the business season.
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 agreement and state registration fees. Other costs that will be incurred by a corporation include fees for filing articles of incorporation, bylaws, and terms of original stock certificates.
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.