Calculating Startup Costs: Setting a Strong Financial Foundation
Many startups begin with a great idea and big dreams. However, bringing those ideas to life can be more expensive than you might have anticipated.
Strong financial planning is a must for any business in the startup stage. Precise calculations and budgeting can help you avoid overspending early on. Here’s how to calculate startup costs for your small business.
Ongoing Expenses
The bulk of your business expenses will be ongoing expenses, which means you will pay them on a regular basis, usually monthly or annually. Some of these expenses are fixed, while others will fluctuate.
Some common ongoing expenses for startups include:
- Rent or mortgage for business space
- Utilities for business space
- Business taxes
- Payroll and benefits (including your own salary)
- Business insurance
- Inventory and storage
- Marketing costs, including website hosting, digital ads, print ads, etc.
- Consumable office supplies such as packaging, pens, notepads, etc.
Calculating these ongoing expenses will help you understand your cash flow needs from month to month.
One-Time Expenses
One-time expenses are purchases you’ll make one time to get your startup off the ground. These include:
- Permits and licensing
- Technology such as computers and point-of-sale systems
- Initial inventory
- Down payment/deposit for your office or store
- Office furniture and signage
Before starting your business, you’ll need at least enough cash reserves to handle these expenses. You can do this by saving up funds on your own, or by taking out a loan.
Lending Costs
With so many initial expenses, many new business owners opt to take out loans to get their companies off the ground. In most cases, these are small business loans. However, some entrepreneurs work with investors on equity financing agreements as well.
Borrowing money to start your business has many benefits. You can focus on development, without having to worry about turning a profit right away. Then, you pay back the loans once your business is successfully up and running.
However, borrowing money does come with some additional costs. You’ll need to pay back the loan plus interest within a designated time frame. You’ll need to keep these costs in mind when planning for your startup’s finances to avoid a tricky situation later on.
Financial Cushion
Running a business can be unpredictable, so it’s important to give yourself a financial cushion when planning your startup costs. Ideally, you should have enough savings to operate for the first year or so, without any revenue contributing.
This will ensure you’re prepared for the natural ups and downs of running a business. If you encounter financial challenges during the first year, you can rely on savings rather than having to close.
Once you’ve evaluated all of these costs, you can start building a budget for your organization’s first few years in operation. Keep in mind that you will likely need to adjust your plans over time once your business launches and your income fluctuates.
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