When you decide to start your own business, it’s an exhilarating prospect, but it’s also riddled with a lot of stress, doubt, anxiety, and pressure. This is further amplified if you are a new entrepreneur; more often than not, these feelings are due to financial concerns. Forget about the profitability of your business in the long run; you also have to handle the upfront costs of setting up your business in the first place, and this can be daunting, to say the least!
When you start drawing up your first business plan, you will notice that the startup costs can be rather huge. From having to source equipment and software to signing a lease and recruiting staff – not to mention permits, licenses, and so on – there is much to consider. A good rule of thumb when calculating your startup costs is to ensure you have enough funds to cover six months’ expenses. This way, you’re giving yourself a cushion as you get your business up and running before you start worrying about profitability.
Now, let’s look at some of the most essential business startup costs you must account for.
Every business, irrespective of size, requires some equipment to run its day-to-day activities. For example, if you’re opening a restaurant, you need utensils, dishware, commercial-grade ovens, etc. If you’re starting a hair salon, you will need styling chairs, hair and beauty care products, and the like. You get the picture.
Of course, the expenses will depend on the scale of your business and the industry. Plus, you might also have to get individual equipment if you have multiple employees. These could be extremely costly. Thankfully, many equipment financing options are available in the form of leases, loans, or lines of credit.
Among the first things you should focus on when kickstarting a business is choosing a business entity with legal, tax, and financial implications. If you want to incorporate your business and make it a separate legal entity, you must file articles of incorporation with your state. You must apply for state or federal licensing or permits even if you are not incorporating. All of this would depend on your location and the nature of your business. For example, companies in the aviation or agriculture industries would require federal licensing, while service-based ones like doctors and hairdressers will need professional licenses.
Whether you’re buying or renting, getting an office space is expensive. If possible, consider working from home in the initial stages of your business. If this is not possible, you can look into coworking spaces to help offset some of the costs. But if you have to open a store or office, you will need to allocate a sizable portion of your expenses to rent and maintenance.
Typically, an office spends about $200 to $1,000 per month on office supplies per employee. It’s a lot of money, but these supplies are invested in helping employees do their jobs more effectively. Some items that come under office supplies include a chair, desk, computer, paper, writing instruments, and so on. Of course, this depends on the nature of your business, but the costs can increase considerably before you even know it – especially if you fail to budget for them!
A business can only grow if it is advertised in the best way. Advertising materials include business cards, paid ads, banners, videos, giveaways, etc. Thanks to social media, much of your advertising can be done for free or at a very minimal cost, so take advantage of it!
However, you need to invest in building a professional website that offers all the required information about your business, services, contact information, etc. Thanks to platforms like Weebly, Squarespace, and Wix, you can build your website cost-effectively. But if you’re not tech-savvy, you might have to hire a professional to make the website for you – this costs money, and you will need to account for it in your budget.
Besides the fixed rent costs and down payment, you must consider covering utility bills, including gas, water, internet, phone, and electricity. If you want to install HVAC units, this will come with an additional cost of a couple of thousand dollars, without the installation costs and upkeep.
You have to pay your workers – even in the early days of your business when you’re not making much profit. Besides base salaries, payroll also includes benefits and compensation, such as overtime pay, bonuses, commissions, paid time off, net pay, and stipends.
Even if you think you can do it all yourself, you will undoubtedly require the help of professionals at some stage of operation. It can be a costly mistake if you decide to handle everything independently and find yourself in a pickle. Professional consultants include attorneys, bookkeepers, and certified public accountants, to name a few. These professionals can guide you through the legal structures to ensure that your operations comply with state and federal regulations and help you understand employee benefit programs.
Just as your vehicle, home, and health need insurance coverage, so does your business. Many types of business insurance are available, he type and level of coverage you need are up to you and the nature of your company. Some of the business insurance policies that are most commonly availed include protection from customers who decide to sue, or disaster insurance (in case your business gets hit by a catastrophic disaster), and theft insurance. Additionally, you may also be legally obliged to get health insurance for your employees, depending on your location and the size of your company.
Understanding how much you need to allocate towards business taxes can be confusing because it depends on your revenue, which can be hard to predict. Factors like your business entity and deductible expenses also play a role. As per federal law, corporations must pay 21% corporate income tax.
For pass-through entities, the business income and loss go through the owners’ personal tax returns. They can claim a 20% deduction on income before paying business taxes. However, working with a skilled CPA (Certified Public Accountant) will allow you to understand what you can deduct, saving time and money.