The first step toward planning for a successful startup is identifying the costs of starting a business.
To help with this cause, we’ve prepared a detailed guideline to show you how to calculate the costs of starting a business successfully.
Business Model Affects the Initial Cost
The ultimate cost for your business is determined by the type of business or rather the business model.
Again, the business model dictates the financial options that you’re suited for.
Generally most of the businesses fall into three categories: online businesses, service providers, and brick-and-mortar businesses.
Online businesses require the least amount of resources to start.
The service providers, as well as the brick-and-mortar, on the hand, are capital intensive. This is particularly true, especially if you need to have office premises, and work machinery.
Again, for the latter business models, you may have to account for business name registration.
In particular, if you decide to start a corporation or an LLC, the business registration fee can be pretty substantial.
Always remember that “Good business models always have solid financial foundations to stand on.”, as Daniel Lewis (Finimpact), mentioned.
Types of Expenses
Expenses for starting a business are generally fall into one of two classifications:
- Capital expenses
- Operating costs
The capital expenses include the hefty business expenses such as the purchase of equipment, property, and even the acquisition of different enterprises.
Operating expenses, on the other hand, refer to the regular expenses that are involved in the daily operations of the business, such as rent, wages, utilities, insurance, and inventory.
Common Startup Costs
The common startup costs refer to the expenses that are common in all business startups.
Some of the common expenses include;
- Office supplies
- Premises rent
- Market research
- Marketing and advertising
- Legal and other professional fees
- Licenses and permits
- Web hosting, designing, and maintenance
- Registration fees
- Operating cash
Now, while the above costs are quite common, it doesn’t mean that they’ll all necessarily apply to your startup.
No. The actual costs are determined by the type of business and the industry.
For instance, if you’re an online business, you’ll not have to account for expenses such as premise rent or even insurance.
Calculating Total Startup Funds
Once you’ve identified your exact business expenses, the next step is to organize them into monthly and one-time expenses.
The one-time expenses refer to the costs you might need only once, especially when starting your business. This includes the purchase of equipment, permits, or designing a business logo.
The monthly expenses, on the other hand, are the recurring expenses such as rent, utilities, and wages.
While at it’ it’s advisable that you calculate at least a year of monthly expenses, though the longer the period, the better.
From here, add up the number to your monthly expenses and the one-time costs to get an estimate of the exact amount you need for starting your business.
Timing Startup Costs is Everything
You should pay for essentials and then pay for the stuff you need in their order of essentiality.
For instance, startup expenses such as payroll and rent will often come up after your business is running.
At this point, they will be running expenses that you deduct from your profits. You may, therefore, want to delay some of these expenses until the business is operational.
However, some enterprises incur some payroll expenses before launching when there is a need to hire and train employees before starting, developing websites, and so forth.
Similarly, these defining points affect assets. For example, the inventory amounts bought before launch and available when starting a business are included in the starting assets.
The inventory purchased after starting a company affects the balance sheet and cash flow, but it’s not a part of the starting costs.
The business needs to grow gradually over time; hence you need to be patient. Let everything develop in unison to avoid one section pulling resources from other areas.
This guideline will help you to calculate your startup cost for your business so that you can request startup funding, attract investors, and estimate when you will get a profit. Generally,
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