How to Estimate Startup Costs for a New Business4 min read
Confused on how much money you’ll need for your startup business? Don’t worry, we have put together a simple approach to breaking down this mystery and creating a clear picture of the funds that your startup business will require.
Keep in mind that different types of small businesses will have different types of startup costs. For example, a clothing retailer might need a storefront and staff to man it, while a widget manufacturer might need manufacturing equipment, a warehouse and staff that is trained to operate the equipment. And then again, if you’re operating an online retail business, you might be doing it at home in your comfy clothes, and don’t need a facility or staff at all.
Startup costs can be sorted into six major categories:
- Cost of sales: Product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping insurance, warehousing.
- Professional fees: Setting up a legal structure for your business (e.g. LLC, corporation), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, attorney fees for ongoing consultation, retaining an accountant.
- Technology costs: Computer hardware, computer software, printers, cell phones, PDAs, website development and maintenance, high-speed internet access, servers, security measures, IT consulting.
- Administrative costs: Various types of business insurance, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs, filing cabinets – anything else you need to have on a daily basis to operate a business.
- Sales and marketing costs: Printing of stationery, marketing materials, advertising, public relations, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, travel and entertainment for client meetings, mailing or lead lists.
- Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation.
FACTOR IN STARTUP TIME
A critical component to creating an accurate startup cost estimate is to determine the length of time it will take you to open your startup business. Every business will be different, if you’re opening up a restaurant versus opening up an online business. No matter the business type, take into account everything you will spend, from the moment you kickoff the startup process, through the time you’re ready to sell a product of service. If you need six months from the time you sign a lease to the time you can put the “OPEN” sign on the front window, calculate how much money you will need for salaries, electricity, rent, etc., during those six months.
RESEARCH SPECIFIC COSTS FOR YOUR TYPE OF BUSINESS
There’s a variety of resources you can tap into to understand specific costs associated with your startup business.
Also make sure you check out your industry’s trade association. It should have an active group of members who are going through or have successfully navigated the startup process, and they typically will be happy to share tips with you. You might even get access to sample business plans and checklists for your market niche, but most importantly, you’ll find out which hidden costs to be wary of in your industry.
Take every opportunity you can to network with business owners in your industry, whether it’s online or in person. They will have the best understanding of how the costs of a typical business in your industry balance out across those six categories. With that knowledge, you’ll be able to create a reasonable cost estimate for starting a business of your own.
ASSEMBLE ALL OF THE PIECES TOGETHER
Once you’ve pulled together the costs for your startup business, put together a Cash Management Report, which will help you project your monthly cash flow.
Above all, be realistic when calculating startup costs for your new business. The first calculation may not be the right one. Continue to refine your analysis until you’re satisfied with the final number, and then do yourself the favor of adding a miscellaneous line item for 10% of your total budget. You’ll spend more than you think to get your that dream startup business going, and the “miscellaneous” category will cover any unexpected costs.
At MCDA CCG we’ve helped countless entrepreneurs build the business of their dreams. Our team of startup experts can assist you with budgeting, forecasting sales, identifying your target market, and much more. With our startup service you gain free access to our HR Services, where we give you a complimentary start to your business with employee handbooks, safety documentation, and payroll set up. Want to learn more? Contact us today by calling (657) 258-0577 or emailing [email protected]