Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Whether you’re bootstrapping, applying for loans, or seeking investors, getting a handle on your startup expenses is a necessity. Understanding the costs of starting a business can help you plan, save, budget, and forecast.
Unfortunately, there are some costs that might surprise you. Setting aside funds for an emergency can help you to survive even when you’ve been blindsided by circumstances.
The following costs are presented for your consideration and planning purposes – so you can make better-informed decisions and reduce your risks.
Common Expenses for Startups
Fees, Permits, and Licenses
Investigate the costs required to operate under your chosen entity name, incorporate, and purchase or apply for any necessary industry licenses. Some of this can be accomplished online. Incorporation may require the assistance of a lawyer, which will, naturally, result in an additional expense.
Currently, the tax code permits business owners to write off some of their startup expenses. The SBA helps to explain which expenses can be written off – and in what amounts – in this useful post.
Different industries may require different types of insurance. For example, a software startup may desire insurance against data breach, while a contractor will require general liability insurance. Do your research and determine which insurance policies are necessary to protect your business from the beginning.
The types of taxes you’ll need to pay – and possibly collect – differ by industry and geography. Some states don’t require tax on food or clothing sales, some cities levy additional taxes, and some states don’t impose any sales tax. Check with your local and state governments for more information. Remember, you’ll also want to set aside money to pay your Federal income tax, most likely on a quarterly basis. Unless you operate at a loss, chances are that you’ll owe something.
You know the saying, ‘time is money.’ If you’re just starting out and leaving your day job in the process, chances are that you won’t be paying yourself a salary. If you’ve gone the hybrid route, continuing to work while you run your own business, you’re undoubtedly aware that your own time is likely to represent your largest and most precious investment. Spend it wisely.
The amount spent on miscellaneous supplies will vary depending on the type of business you’re starting. If you’re launching a design firm, for example, you’ll probably need some high-end desktops, creative software, and other industry-specific tools to ensure that you’re able to deliver top-notch designs to your clients.
If you’re planning to open a restaurant, you may need to invest in kitchen appliances (if your intended location doesn’t already have them) and lease or purchase an operating space.
Most businesses will also require expenditures on some combination of computers, equipment, furniture, vehicles, and point-of-sale systems.
Many businesses, but not all, require some form of capital expenditure to get started.
There are certain expenses you can anticipate on a monthly basis. You should budget for rent, utilities, subscription software, packaging supplies, shipping, marketing, and web hosting – all necessary to keep your business going.
Entrepreneurs do a lot of things themselves, especially when they’re just starting out. At some point, though, it will hopefully become unwieldy and it’ll be time to pass off some responsibilities. Exactly which responsibilities those are will depend on your business. Two commonly outsourced tasks are digital marketing and accounting.
If you’re planning to hire staff, you’ll need to consider how many people you’ll need, what you expect to pay them, what benefits they’ll accrue, and how much to budget for unemployment insurance.
Having a bit of money set aside for unanticipated circumstances can be helpful, such as having one of your estimates end up on the low side and you finding yourself surprised with a higher bill. It’s also wise to keep extra capital available to cover lower than expected sales projections or the proverbial leaky roof.
Getting Good Numbers
In order to create the most informed business plan or business model canvas, you’ll want to ensure that your numbers are as accurate as possible. This can help you to create the best plan possible as you prepare to embark on your endeavor. Some estimates will change and your budget will require a degree of flexibility, but an informed starting point can help in making better decisions from the start.
In addition to researching costs online, you can also get a good estimate from these sources:
If you know of others in your field who might be willing to speak candidly with you, set up a time to discuss their experiences with starting a business. They may be able to provide valuable insight into expenses that caught them by surprise or purchases/investments they regret having made. SCORE and networking events can be a valuable resource for meeting other individuals in your industry.
Your own prospective suppliers are often one of the best sources of information Suppliers can fill you in on the cost of their goods, as well as their experience with others in the industry. Sure, they’re hoping to solicit your business, but they may also prove to be a valuable resource.
Understanding the costs of starting and running a business is an important first step. While watching the numbers add up can be intimidating, don’t let it stop you from following your dream. If something doesn’t look right, however, make sure to take another look and possibly tweak your business plan in order to provide yourself with the best chance of success.
Remember, your business won’t be running in a vacuum. If you can, seek advice and feedback from others, whether they’re professionals in your field or potential clients and customers. Constantly reassess the feasibility of your plan and adjust it as and when necessary. Running a business is an iterative process, so you should plan to incorporate useful feedback from the beginning!
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.