How to Estimate Startup Expenses

Being aware of your startup expenses is super important while you're building your new brand, but getting an accurate estimation can be tricky. You can’t estimate every single expense you’re going to have. That said, it’s still necessary for you to do your research and make well-educated assumptions—and plan accordingly.

Validating your business idea and having a solid business plan are essential if you want financial backers to invest. Investors want to see that you have the foresight to predict what your business will need during its launch phase, as well as the knowledge to ensure your business is going to recoup startup costs.

In this article we’ll explain what startup costs are and give you some tools for planning and managing them—as well as some tips for managing your personal expenses, too!

“What Types of Costs Should I Expect for My Startup?"

There are two types of startup costs: expenses and assets. Let’s take a look at what falls under each category!

Expenses

Expenses are operational costs that your business incurs during the startup phase. They could be from travel, payroll, office supplies, marketing materials, rent, and so on and so forth. Initial organizational costs like legal fees and state incorporation fees are also considered startup expenses.

Keep in mind that many expenses are tax deductible. You can write off up to $5,000 in business startup costs and an additional $5,000 in organizational expenses the year you start your business!

Assets

Also known as capital expenses or expenditures. These include the costs of buying assets like inventory, property, vehicles, or equipment. They also include upfront payments for security deposits. Startup assets usually don’t qualify for tax deductions, but some can be written off through depreciation.

“What Do I Need to Spend Money On?”

You should try your best to accurately plan what your expenses will add up to before your business starts generating income. To estimate your startup costs you’ll need to create two lists: one for expenses and one for assets.

Develop these lists by simply considering all of your startup costs and the category each one falls under. Then make an educated guess about what amount each expense will total. Don’t forget to include the cost of marketing materials or web services in these calculations!

• Use spreadsheets to easily calculate the total after you’ve generated your lists.
• Pay careful attention to tax laws in determining which items you can deduct (expenses) and which items you can’t (assets). For example, it may seem that a computer would be considered an asset, but U.S. federal tax regulations allow you to deduct the cost of a personal computer as an expense!
• Once you’ve developed your lists, go through them item by item and categorize things as “Optional” or “Required”. This will help you determine which items absolutely must be factored into your startup expenses and which can wait until you’re generating revenue.

Example: if you have a security deposit and rent for a facility on your list, you might consider starting your business from home rather than jumping right into a lease agreement. Many major businesses began at home, including Apple and Microsoft!

Once you’ve determined what your required expenses are, it’s time to build your to-do list for getting your startup off the ground. Once again, use spreadsheets to keep a running total of the costs you plan to incur. Be sure to use past experience and new research to inform your estimations!

“That’s Great and All, But What Will It Cost?”

You probably have more questions than answers about your startup costs at this point—especially if you aren’t done researching them.

The truth is, the only way to get a realistic estimate of your total startup costs is to do the calculations. That said, there are some handy tools you can utilize. Your local Small Business Development Center, MBDA Business Center, and SCORE can all provide you with valuable advice on how to calculate your startup costs!

Though it’s not fun to discuss, expense management is essential for any business to survive, thrive, and yes, profit. If your expenses run away with all your revenue, there’ll be nothing left to pay employees—or yourself! So let’s get into the what, why, who and how of managing your expenses and taxes.

“Why Should I Manage Expenses?”

There are two main reasons.

First, you need to leverage every possible tax deduction in order to save as much money as you can in your first couple of years. The IRS has very strict guidelines for the records you need to maintain, and the burden of proof is on you, the business owner.

Maintain comprehensive, accurate records of all the expenses you incur, from your rent/lease payments to the cost of office supplies. Using online accounting software can make this a lot easier. Think of it this way—you’re paying bills to be in business, so why should you pay taxes on them if you don’t have to?

The second reason is to keep track of where your revenue’s going and determine how you can maximize net profit. The only way to figure out exactly how expensive it is to keep your doors open, and where you might be able to cut back, is by analyzing your expenses.

Businesses too often fail simply because they neglected to properly track and manage their expenses. Yes, it’s a chore, but make sure you keep up with it on a monthly, weekly, or even daily basis!

“How Can I Manage Expenses Then?”

There’s the tried and true physical ledger method, and then there’s the much easier, modern way: online accounting software.

The goal is to take as much pain out of this process as possible, so if you’re even marginally adept with technology, accounting software will probably be the easiest route for you. Many of these software, like LivePlan, make it easy to track your cash-flow in addition to your expenses.

Generate regular expense reports, preferably using expense report software with useful charts and graphs of your expenditures. Using these tools, you can get a bird’s eye view of your expenses and plan for the future accordingly!

“Then Who Should Manage My Expenses?”

There’s no hard-and-fast answer to this. You can handle all of the bookkeeping in-house using accounting software, or you can hire a third-party accountant to manage it for you. 

If you do your accounting in-house, make sure there are checks and balances in place. Have more than one person looking at the books at all times. Audit the reports each month or quarter to ensure no “funny business” is going on with your company’s hard-earned money.

If you have an accountant or accounting firm handle this for you, make sure they’re trustworthy and properly licensed. Many business owners have been driven to the brink of bankruptcy because some dishonest person was “cooking the books” to cover up embezzlement, or worse. It might be wise to have an additional accountant or accounting firm audit the books periodically—just to make sure everything is on the up and up!

Whichever route you choose, you should always bring in a reputable, experienced accountant at tax time to make sure you’re properly documenting your expenses and maximizing your deductions. Periodic meetings with a tax accountant can make the year-end process go much smoother.

“What Happens if I Don’t Manage Them?”

The absolute worst-case scenario is prison time—if you’ve been claiming tax deductions that aren’t really there. The more likely undesirable scenario is that you’ll find your business so indebted that bankruptcy is the only viable option. Of course, these are both terrible ways for a business to end, so avoid an untimely demise at all costs and manage your expenses properly!

Before you seek out new ways to earn money, first you need to get your everyday expenditures under control and eliminate any major problems with your spending habits.

Here are some steps you can take to get your finances under control and minimize the amount of money you spend on a monthly basis!

1) Watch Out for Small Expenses

Often people assume that large expenses, like a new TV or surround-sound speaker system, are where the most money is wasted. Although these put a serious dent in your finances, small expenses actually tend to be much more financially draining, especially since those large purchases retain value that you could claw back later on.

It’s so easy to blow a hole in your wallet by not paying attention to all the small expenses that add up on a daily basis. Maybe you’re buying a few too many pints at the pub throughout the week or you’ve become a little too fond of take-out.

Maybe you keep buying little inexpensive gadgets that you think might help you somehow but you never take the time to learn how to use them (like the stuff on ‘Shut up and Take My Money’).

These little expenses can stack a mile high, especially since they have no resale value. Start thinking more critically about your small purchases. Are you really going to use that little gadget, or is it just going to sit on your shelf and collect dust?

2) Significantly Reduce Recurring Payments

Oftentimes recurring payments can be reduced, but our laziness prevails. It’s so important to reduce these costs so you don’t keep shelling out for them unnecessarily. Think about all of your recurring payments: your cell phone bill, website subscriptions, magazines, you name it.

Maybe you’re paying for 50 channels but you only ever watch 10. Maybe your insurance-provider doesn’t have the most competitive rates. Maybe you’re paying for an all-inclusive gym membership even though you only go once a week to hit the weights. Where can you cut off any excess?

3) Invest in Yourself, Not Material Possessions

Given that you’re here on Startup Savant, you’re probably someone who’s willing to invest in yourself and your future. Remember that investing in your education, your business, and your own general development is far more important than buying material things.

Try not to get too caught up in material possessions, especially nonessential ones. You’re far better off investing money in yourself, where you’ll actually get a return!

4) Buy Needs, Not Wants

If you spend all your money on stuff you want, you’ll have none left for the things you actually need. Ask yourself whether the product or service in question is a necessity or an object of desire, and spend accordingly. Remember that emergency expenses can always come up out of the blue!

5) Minimize Asset Depreciation

If you purchased something a while ago and haven’t been using it, sell it as soon as possible. This way you’ll be able to minimize depreciation and maximize resale value. Don’t just leave things laying around if you know you’re never going to use them again!

Few of us enjoy focusing on startup expenses—we’d much rather focus on end-goals. Nevertheless, this is an incredibly important step in your business launch, and one you need to navigate carefully!

If you don’t plan your startup costs wisely you might find it next to impossible to finance a business. Paying close attention to your expenses is a surefire way to increase your profits, as well as your peace of mind! It’s the only way to know for sure you’re building a healthy and wealthy business.

Meet the Authors: This guide for estimating startup expenses and staying on budget is a collaboration between Dan Western (Founder of Wealthy Gorilla) and Ryan James (Founder of Startup Savant).