Last Updated 24 April 2017 | By:

How to Estimate Startup Expenses

& Stay on Budget

How to Estimate Startup Expenses Without Messing Up

Building a new brand is rough, but one of the most effective ways to lighten the load is to come to terms and estimate startup expenses. That’s exactly what we’re tackling in this article because, yes, it’s challenging for newbies and can be difficult to tell how much money a startup needs until in “the thick of it” and in business.

Startup expenses are important, but difficult to accurately determine because you can’t know for certain what all the expenses will be. It becomes necessary to estimate based on research, well-educated assumptions, and estimates to plan accordingly.

This is the primary reason why validating your business idea and having a solid business plan is essential for financial backers to invest: they need to see 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. That said, let’s dive in. Enjoy!

Step 1: Create a Plan

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

Begin by understanding how startup costs are categorized and what counts as a startup cost.

Basically, any expenses you have before your business starts generating income are considered a startup cost, and these costs include two kinds of spending: expenses and assets. While it may seem overly simple, it’s a tried and true fact that all business startup costs can be categorized under one of these two terms.

 

Expenses

Expenses are operational costs your business incurs during its startup phase. While these expenses continue throughout the life of the business, you should attempt to accurately plan for how much these expenses will cost you before your business starts generating income.

  • These expenses include things like travel, payroll, office supplies, marketing materials, rent, and so on and so forth.
  • Startup expenses also include initial organizational costs like legal fees, state incorporation fees, and the like.

Note: 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 in the year you start your business.

 

Assets

Also known as capital expenses or expenditures; one-time costs of buying assets like inventory, property, vehicles, or equipment. They also include making upfront payments for security deposits. If you’re opening a brick and mortar store, assets would also include things like shelves, tables, counters, cash registers, and so on.

  • Startup assets usually don’t qualify for tax deductions, but some can be written off through depreciation at tax time.
  • These are the basic types of costs you can expect to incur during startup..

Armed with this understanding of the basic categories of startup costs, and the types of costs that fall under each category, you can continue your planning by determining what your individual business needs are and what costs you need to prepare for.

 

“What Do I Need to Spend Money On?”

To estimate your startup costs you’ll need to create two lists – one for expenses and the other for assets or capital expenditures.

Develop these lists by considering the aspects of your business with costs associated with them during the startup phase, such as facilities improvements or the equipment and inventory you need to begin operations.

Don’t forget  the marketing materials needed to attract customers, costs to build a professional website through providers like Weebly or Wix, or the security deposits you might have to pay. For every item on these lists, make an educated guess of what the amount of the expense will be.

  • 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 as opposed to an expense, but United States federal tax regulations allow you to deduct the cost of personal computers as expenses rather than depreciating them as assets.
  • Once you’ve developed your lists, go through each list item by item and categorize as either “Optional” or “Required”. This determines needs vs wants, or which items absolutely must be factored into 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 whether you have spare room in your home that you can start your business out of, rather than jumping right into a lease agreement. Many major businesses began at home, including Apple and Microsoft!

Next up is the actual “to do” list, where you explore necessary expenses and assets needed to get your startup off the ground. Once again, use spreadsheets because they help you keep a running total of the costs you plan to incur.

Often you’ll be making your best educated guess as to what things will cost, but be sure to use past experience, research, YouTube videos, free educational content, and advice from other entrepreneurs to guide you.

 

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

By now, you may have more questions about your startup costs than answers. This usually means you aren’t done researching, or you haven’t compiled your list of expenses & assets yet.

  • If you want a quick and potentially inaccurate answer to what it will cost to start a business, a useful estimate based on a 2009 study by the Ewing Marion Kauffman Foundation has the average startup cost for a new business, from scratch, at just over $30,000.
  • If your business is home-based, online, or freelancing, your costs may come in quite a bit lower than this. You have to calculate the costs. Use some handy tools to help you factor everything in and make educated estimates about your startup expenses.

For example, SCORE, your local Small Business Development Center, and your local MBDA Business Center can provide you with valuable advice on how to calculate your startup costs.

Step 2: Expense Management

It isn’t the most fun topic to discuss, but expense management is essential for any business to survive, thrive, and yes, profit.

If your expenses run away with all of your revenue, there’s nothing left to pay employees, much less you! This is why it’s so crucial for a business to pay careful attention to their expenses, taxes and manage those both accordingly.

 

“Why Should I Manage Expenses?”

There are a couple of reasons why you should keep track of your expenses and manage them the best you can. First, you want to leverage every possible tax deduction you can to save yourself money in the first couple years.

  • You’re paying bills to be in business so why should you pay taxes on the money you’re using to maintain your business?
  • The IRS has very strict guidelines on what sort of records you need to maintain, and the burden of proof to show that you actually incurred the expenses you are claiming is on you, the taxpaying business owner.

Therefore, maintain comprehensive and accurate records of all expenses you incur in the course of business, from your rent or lease payments to your utility payments and even the cost of office supplies. Most online accounting software packages will provide you with the means to keep track of your expenses.

The second reason to track expenses is to see where your revenue’s going and determine how you can maximize net profit. Only through analyzing your expenses can you determine just how expensive it is to keep the doors open, and figure out where you might be able to cut back and save money.

Businesses often fail because they neglected to properly track and manage their expenses, so it’s important to keep up with this chore on a monthly, if not weekly or daily, basis.

 

“How Can I Manage Expenses Then?”

You can use the tried and true physical ledger method, or you can manage your expenses (and revenue) using online accounting software.

Remember, you want to take as much of the pain out of this process as possible, so if you have even a passing familiarity with computers, it often makes more sense to use the right software packages, like expense management software, for your accounting and expense management needs. You can also use LivePlan to plan and track your business cash-flow. They make it incredibly easy to do.

Keeping track of your expenses will help you understand where your money’s going. You should generate regular expense reports, preferably using expense report software that provides useful charts and graphs of your expenditures, to see just what your business is spending its money on.

Using these tools, you can get a bird’s eye view or a detailed examination of your expenses, and plan accordingly for either restricting spending or just better managing those expenses.

 

“Then Who Should Manage My Expenses?”

A tricky question since there’s no hard and fast answer. You can handle all of the bookkeeping in-house, or you can have a third party accountant manage it for you. The issue is trust: make sure whoever is managing your expenses can be trusted.

Many business owners have been driven to the brink (or over the brink) of bankruptcy because some untrustworthy person was “cooking the books” to cover up embezzlement or worse.

  • If you have your accounting done in-house, make sure there are checks and balances in place. Have more than one person looking at the books at all times, and auditing 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 and certified. 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.

Your business’s money is its lifeline, so ensure that lifeline is properly cared for.

At tax time, however, you should always bring in a reputable, experienced accountant. This professional can make sure you’re properly documenting your expenses, and maximizing the tax deductions your business is due.

Periodic meetings with your tax accountant throughout the year can make the year-end process go much smoother, and will help ensure you’re properly documenting your expenses throughout the year.

 

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

Disregard at your own risk!. What sorts of things can happen if you don’t properly manage your expenses? The absolute worst-case scenario is prison time, if you’ve been claiming tax deductions that aren’t really there. You might also find your business bleeding money to the point that you simply can’t keep the doors open anymore.

Your business might find itself so indebted that bankruptcy is the only viable option left. These are all terrible ways for a business to end, so it’s crucial you properly manage your expenses to avoid these untimely demises of your business.

Step 3: Cut Back On Costs

There are so many articles on the web about making more money. The internet’s flooded with them. Who doesn’t want to make more money?

The sad reality is that most people searching for them and looking to make more money, are people constantly burning big holes in their wallets for the most ridiculous reasons. They don’t know how to invest their money properly so they decide to just look up how to make more instead of controlling their spending habits and eliminating big mistakes in their everyday expenditures.

Let’s look at several steps you can take to minimize the amount of money you spend on a monthly basis and get your finances under control. This is an important step before seeking new ways to earn money.

 

1) Watch Out for Small Expenses

Most assume big expenses are where they waste the most money. Maybe you purchase a luxury like a new T.V, sofa, or surround sound speaker system for your desktop. It’s going to put a serious dent in your finances, but it’s not where most people lose their money. Especially since these type of items can always be sold later on to claw back some of the money.

  • Most people blow a hole through their wallet by not watching the small expenses they’re making on a daily basis.
  • Maybe it’s food, grocery shopping, impulse buys at the gas station, or you become a little too fond of take-out. Or maybe it’s drink and you’re buying quite a few pints of beer at the pub throughout the week, or you’re going out for Starbucks a little more than you actually realize.

Maybe you just continue to buy little inexpensive gadgets that you think are fine to buy because they’re cheap and fun. They actually now have websites specifically for doing exactly that. Just take a look at ‘Shut up and Take My Money’.

Each day, those little expenses can stack a mile high. They have no resale value. If you spend money on them that’s it. So watch out for the small expenses as they can easily pile up and start to drain your bank account at a frightening pace.

 

2) Significantly Reduce Recurring Payments

Recurring payments can often be reduced, but our laziness prevails. It’s so important to reduce the costs of these types of payments as you’re obviously going to be shelling out for them on a regular basis – mobile phone bill, website subscriptions, magazines, T.V channels, you name it. Certain bills like these can be reduced if you don’t necessarily need everything you’re paying for.

  • You might be paying for 50 different channels but you only ever watch 10. Can you reduce the amount you’re paying for and cut off the excess?
  • What about rent, insurance, fuel? Have you ever looked at reducing any of these costs where you can?
  • Insurance is often a cost that can easily be cut in half by shopping around.
  • Are you utilizing the full gym membership and going to fitness classes or just hitting the weights?

 

3) Invest in Yourself, Not Material Possessions

Since you’re here on Startup Savant, you’re likely someone willing to invest in yourself and your future. Yet, this point needs to be touched on. Spending money on yourself by investing in your education, your business, and your own development is something far different and greater than buying material “stuff.”.

Try not to get too caught up in material possessions that you’ll use a couple of times and then never again. You’re far better off investing your money in yourself, where you’ll actually get a return, than waste it on objects.

 

4) Buy Needs, Not Wants

Probably one of the biggest mistakes people make with their money is buying all the stuff that they want but don’t necessarily need. Then what happens? They run out of money to buy the things they actually need.

Do you really need all those clothes? All those gadgets? Focus on buying what you need before you buy what you want. This way you’ll always have the things that you need, and can hopefully control your other spending habits a little better.

 

5) Minimize Asset Depreciation

Anything purchased a while ago that isn’t in use, sell it as soon as possible. This way you’ll be able to minimize the level of depreciation on the things you own and retain as much money as possible when you go to sell. Don’t leave things laying around for long periods of time if you’re never going to use them again. Just sell them quickly before they drop even further in price.

Wrapping Up

Developing an estimate of startup costs is probably the most painful and annoying part of developing an initial business plan. After all, this just lays out how much money you’re going to spend, and doesn’t deal with the excitement of the product or service you’re going to offer and all of the money you’re going to make.

Few of us like to focus on the money we have to spend; we would much rather focus on the end results, financial freedom or success. Nevertheless, this is an important step to planning for your business launch, and one you should carefully navigate to ensure your business’s lasting success.

Remember, If you don’t plan wisely for your startup costs you might find it next to impossible to finance your business. If you pay attention to how your business spends, you’ll find your business is more profitable and get much more enjoyment through the peace of mind of knowing 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).