One of the most important aspects of building your business plan and validating your business idea is estimating what the business expenses will cost to get your business off the ground.
This important step is also one of the most bewildering, because it can be difficult to tell just how much money your startup will need until you’re in “the thick of it” and are actually starting the business.
Startup expenses are important, but difficult to accurately determine because you can’t know for certain what all of the expenses will be, and you’ll have to estimate them based on research.
It’s still important, though, to make well-educated assumptions and estimates on startup costs, so you can plan accordingly.
This is the primary reason why a solid business plan is essential for financial backers to invest in your business: they need 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 those startup costs.
Before you start estimating anything, you need to understand 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 are the costs for operation that your business incurs during its startup phase. While these expenses will 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.
Many of these are 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.
These costs are also known as capital expenses or expenditures, and are one-time costs of buying assets like inventory, property, vehicles, or equipment.
They also include making upfront payments for security deposits. If you are opening a brick and mortar store, assets would also include things like shelves, tables, counters, cash registers, and so on.
These startup assets usually do not 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, along with examples of the costs.
Every business has different needs, so you may have startup costs that aren’t explicitly listed here. 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.
To estimate your startup costs, you’ll need to create two lists. One list will be for your startup expenses, and the other list will be for your assets, or capital expenditures.
You develop this list by thinking about the aspects of your business that will have costs associated with them during the startup phase, such as facilities improvements or the equipment and inventory you need to begin business.
Don’t forget, though, the marketing materials you will need to attract customers, costs to build a professional website through Weebly or WordPress on Bluehost, 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.
This is where using a spreadsheet can come in really handy, since you can easily calculate the total after you’ve generated your list! As you develop your list, pay careful attention to tax laws in determining which items you can deduct (expenses) and which items you cannot (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 these items as essential or optional.
This way, you can determine which items absolutely must be factored into your startup expenses, and which expenses can wait until your business begins to make income.
For 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 such names as Apple and Microsoft! Next up is the actual “to do” list, where you lay down all of the necessary expenses and assets you will need to get your startup off the ground.
Once again, it will be useful to use a spreadsheet for this, since it will help you keep a running total of the costs you plan to incur along the way to your business launch.
Quite often, you’ll be making your best educated guess as to what things will cost, but be sure to use past experience, research, and advice from other entrepreneurs to guide your cost estimates.
By now, you may have more questions about your startup costs than you have answers. This usually means you aren’t done researching, or you haven’t worked along with us and compiled your list of expenses and assets.
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 for yourself, though; we can’t just tell you a magic number that will be exactly right for your business.
What you can do, though, is 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.
Developing an estimate of your business’s startup costs is probably the most painful and annoying part of developing your 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’s launch, and one that you should carefully navigate to ensure your business’s lasting success.
Plan wisely for your business startup costs, and you will find your business becomes profitable sooner than you might have thought otherwise.
If you don’t plan wisely for your startup costs, though, you might find it next to impossible to finance your business.
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