There’s more to a business than furnishings and office space. Especially in the early stages, startup costs require careful planning and meticulous accounting. Many new businesses neglect this process, relying instead on a flood of customers to keep the operation afloat, usually with abysmal results.
Key Takeaways
- Startup costs are the expenses incurred during the process of creating a new business.
- Pre-opening startup costs include a business plan, research expenses, borrowing costs, and expenses for technology.
- Post-opening startup costs include advertising, promotion, and employee expenses.
- Different types of business structures—like sole proprietorships, partnerships, and corporations—have different startup costs, so be aware of the different costs associated with your new business.
Startup costs are the expenses incurred during the process of creating a new business. All businesses are different, so they require different types of startup costs. Online businesses have different needs than brick-and-mortars; coffee shops have different requirements than bookstores. However, a few expenses are common to most business types.
Understanding Common Business Startup Costs
The Business Plan
Essential to the startup effort is creating a business plan—a detailed map of the new business. A business plan forces consideration of the different startup costs. Underestimating expenses falsely increases expected net profit, a situation that does not bode well for any small business owner.
Research Expenses
Careful research of the industry and consumer makeup must be conducted before starting a business. Some business owners choose to hire market research firms to aid them in the assessment process.
For business owners who choose to follow this route, the expense of hiring these experts must be included in the business plan.
Borrowing Costs
Starting up any kind of business requires an infusion of capital. There are two ways to acquire capital for a business: equity financing and debt financing. Usually, equity financing entails the issuance of stock, but this does not apply to most small businesses, which are proprietorships.
For small business owners, the most likely source of financing is debt in the form of a small business loan. Business owners can often get loans from banks, savings institutions, and the U.S. Small Business Administration (SBA). Like any other loan, business loans are accompanied by interest payments. These payments must be planned for when starting a business, as the cost of default is very high.
Insurance, License, and Permit Fees
Many businesses are expected to submit to health inspections and authorizations to obtain certain business licenses and permits. Some businesses might require basic licenses while others need industry-specific permits.
Carrying insurance to cover your employees, customers, business assets, and yourself can help protect your personal assets from any liabilities that may arise.
Technological Expenses
Technological expenses include the cost of a website, information systems, and software, including accounting and point of sale (POS) software, for a business. Some small business owners choose to outsource these functions to other companies to save on payroll and benefits.
Equipment and Supplies
Every business requires some form of equipment and basic supplies. Before adding equipment expenses to the list of startup costs, a decision has to be made to lease or buy.
The state of your finances will play a major part in this decision. Even if you have enough money to buy equipment, unavoidable expenses may make leasing, with the intention to buy at a later date, a viable option. However, it is important to remember that, regardless of the cash position, a lease may not always be best, depending upon the type of equipment and terms of the lease.
Advertising and Promotion
A new company or startup business is unlikely to succeed without promoting itself. However, promoting a business entails much more than placing ads in a local newspaper.
It also includes marketing—everything a company does to attract clients to the business. Marketing has become such a science that any advantage is beneficial, so external dedicated marketing companies are most often hired.
Employee Expenses
Businesses planning to hire employees must plan for wages, salaries, and benefits, also known as the cost of labor.
Failure to compensate employees adequately can end in low morale, mutiny, and bad publicity, all of which can be disastrous to a company.
Additional Startup Cost Considerations
Have some extra money set aside for any overlooked or unexpected expenses. Most companies fail because they lack the cash to deal with unexpected problems during the business season.
It is important to note that the startup costs for a sole proprietorship differ from the startup costs for a partnership or corporation. Some additional costs a partnership might incur include the legal cost of drafting a partnership agreement and state registration fees.
Other costs that may apply more to a corporation include fees for filing articles of incorporation, bylaws, and terms of original stock certificates.
Launching a new business can be invigorating. However, getting caught up in the excitement and neglecting the details can lead to failure. Above anything else, observe and consult with others who have traveled this road before—you never know where you might learn the business advice that helps your particular business succeed.