If you’re starting a business, you likely already know that calculating startup costs is a crucial step in getting your company off the ground. Simply put, you need money to make money.
Depending on the type of business, you might need to create a website, rent equipment and an office space, obtain licenses and permits, and hire a team of skilled workers—all of which add up in different bills to pay each month. To better understand your expenses and start a successful business venture, you’ll want the answer to this burning question: how much does it cost to start a business?
We’ve put together a guide on how to identify expenses, finding the best way to estimate costs and picking the right financing methods for your new business.
Understanding types of costs
Before you start calculating the cost of starting a business, you need to understand how startup costs are categorized (and check out our business startup checklist). As you write out your business plan, keep in mind that are two main types of spending:
Expenses: Startup expenses can include initial legal and state incorporation fees, as well as deductibles like business travel and meals, according to the SBA guidebook.
Expenditures: Also known as capital expenses or assets, expenditures are one-time purchases such as equipment, property and a vehicle. These cannot be tax deductible.
Identify your startup expenses
Most businesses fall into three categories: service-based businesses, online businesses and brick-and-mortar businesses. No matter what type of entrepreneurship you run, there are common startup expenses you’re likely to encounter, including:
Making a business website: Choosing a website builder that provides free web hosting, domain name and scheduling software to create a service website or online store. (Estimated around $10-$49/month. Check out our article on how much a website costs for more in-depth analysis.) Learn how to make a website for your business here.
Equipment and supplies: Depending on the type of business you start, you will need the right equipment to aid you in getting the job done. For example, if you’re starting a mobile business (like a food truck), you’ll need to finance a truck, cooking equipment and refrigeration equipment; operating supplies, ranging from oil, petrol and water to your POS system; and marketing supplies, such as a menu board and online ads. These are examples of sunk costs, which means money spent that cannot be regained. For more information, check out our guides on how to start a food business (as well as how to start a food prep business). Meanwhile, starting an online store is a cost effective way to break into retail.
Branding: Create your own logo for your business and communicate exactly who you are, what you do and how that benefits your target audience. These business website examples show how when done right, your site can effectively represent your brand, corporate identity and business.
Business licenses and permits: You'll likely need to research how to get a business license. Depending on the state where you’re conducting business, you will have to consider processing and recurring fees that range between $50 and a few hundred dollars per year. The US Small Business Administration’s (SBA) website also has information about federal business licenses. The cost of registering your business can also vary between states, so it's important to check for each state, whether you're starting a business in California, or elsewhere.
Legal advice: While a home-based business may have little startup legal fees, other types of businesses, such as LLC, corporation or partnership may incur heftier attorney expenses leading up to tens of thousands of dollars. There’s also trademarking your business name or logo which represents additional costs to starting a business.
Payroll: Wages, employee salaries, benefits and perks, which is all dealt by human resource management.
According to research, an overwhelming 95% of entrepreneurs worldwide end up financing their startups. Small business owners need a stronger sense of self-reliance than in the previous economic climate. Thus they are also increasingly investing on average more of their own capital, such as their own savings, informal investment from neighbors, family and friends, as well as peer-to-peer lending, crowdfunding sites and microfinancing.
How to calculate the cost of starting a business
There are various ways to estimate how much it will cost to start a new business. Once you differentiate between these types of costs, you’ll be able to better manage your business cash flow and assess your company’s overall profitability.
01. One-time vs. ongoing costs
A one-time expense can be anything from equipment purchases to paying for a special ‘one-off’ service, such as a business consultation or legal advice. When you make a one-time purchase, you may also find more money flowing out of your business than coming in as you go over your monthly bookkeeping. Generally speaking, you will need to make up for any monetary loss from such unusual or nonrecurring expenses in the next month—so plan your one-time costs accordingly.
In stark contrast, ongoing costs should not alter your monthly cash flow since they are included on a regular basis in your overall budget. Typically, ongoing costs are rent, utilities, insurance and employee salaries.
02. Essential vs. optional costs
Certain expenses cannot be avoided, including those for development and growth. Essential costs are taxes, employee salaries, human resources, debt repayment, business software, and more (like plumbing equipment for someone starting a plumbing business).
On the other hand, optional costs are made if the budget permits it. They can include upgrading the office coffee beans, snacks or any kind of small perks.
03. Fixed vs. variable costs
Similar to ongoing expenses, fixed costs are paid regardless of how much you sell. In other words, these costs do not change and should not affect your cash flow. Your weekly payroll, rent for office space, and even equipment depreciation are common examples of fixed costs in most businesses.
Variable costs are based on sales volume, thus as your profits increase so do variable costs, such as raw materials and production supplies. If you run a successful bakery, you will have higher variable costs of flour, sugar and butter.
Find your financing methods
When it comes to financing your startup, there are multiple options available. Below are a few suitable business funding models that are low risk and effective.
01. Small business loans
The U.S. Small Business Administration (SBA) offers small businesses different types of loans, including 7 (a) loans, 504 loans and microloans. SBA-guaranteed loans have competitive rates and fees compared to non-SBA loans and provide unique benefits, such as flexible overhead requirements and no collateral.
02. Government grants
There are thousands of government grant opportunities for small businesses distributed on a federal, state and local level. Some examples include the National Institute of Health Grants, which reserves grants for small businesses specific to research on COVID-19; the Rural Innovation Stronger Economy (RISE) grants which support rural jobs and new businesses in the agricultural industry, providing funding between $500,000 and $2 million; and more.
A third way to raise money for your business is by reaching out to an angel investor. These are affluent individuals who can invest their own money in startups in exchange for ownership equity in the business. While there is no set amount for these types of investors, investment is known to range from a few thousand dollars to a few million dollars. What about crowdfunding? That is another option if investors are hard to come by.