What Is the Cost of Starting a Business?
Start by determining what type of business you’re starting and walk through this list to help you understand what the cost of starting a business might be for you.
The question of how much it will cost to start a business is certainly a loaded one. It can be anywhere from hundreds of thousands of dollars to virtually free. It all depends on the kind of business you’re interested in starting and how you intend to operate.
There is a comprehensive list of things you need to plan for when you’re looking to start a business, and you can’t create an accurate estimate of what the costs will be until you’ve accounted for everything. The more thorough you are, the less likely you are to be surprised later.
What Kind of Business Are You Starting?
If you’re looking to invent something revolutionary, you’re likely going to run into a substantially higher startup cost than someone who is looking to resell premade goods. If your business deals with providing a service, what kind of service will that be? A mom and pop style diner would have a lot less overhead than a gourmet dining bistro.
You need to be able to clearly define your business to know exactly what it will start. Once you have that definition, you can research what startup costs are for similar businesses. Always expect to spend more than those estimates. You need to be able to account for inevitable small errors or perhaps small changes to your plans that may happen along the way.
Do You Need Special Licensing or Permits?
Some areas of work require special licenses or permits. Certain service fields will require them, and certain retail outlets will need special licenses or permits depending on what they intend to sell. Some of these licenses are very costly to apply for, and those applications don’t necessary come with the guarantee that you’ll be granted the license or permit. You may be initially rejected, have to modify aspects of your business, and then reapply.
You should always account for rejections within your budget. Of course, it always helps to wait to apply for licenses or permits until after you’re sure you’ve exceeded the criteria for eligibility and can easily prove your qualification. This reduces the potential for rejection. There’s no such thing as being too thorough.
Are You Online, at a Physical Location, or Both?
Online businesses are nearly always the least expensive to start. Overhead is relatively low. If you have products to sell, fulfillment and storage of those products is going to be one of your largest expenses. If not, your overhead can be as low as your home office and hosting costs. These are easy to start, and easy to scale.
If you’re internet only or utilizing both a physical location and an online presence, you’ll need to determine the cost of a website. It ultimately boils down to the kinds of features you’ll need to keep your website running. If your site is going to be something like a glorified blog, it will likely be less expensive. If you need comprehensive eCommerce and a login system, expect to pay much more.
Physical locations are intense when it comes to overhead. You have to pay for your utilities, as well as the cost of the building. Whether you’re leasing it or buying it, it’s going to be significant part of your budget. Consider starting off small by subletting from another business or finding a shared office while your business is still in its infancy. You can move into a larger office when you’re starting to see substantial income.
What Will Goods or Services Cost?
How much does it cost to make what you make or do what you do? Import based businesses are usually easier. You’ll know immediately how much you’re spending and bulk purchases will keep your costs low. Services have a cost of delivery too – even virtual services. You may need custom software or automation programs designed to help deliver your services.
No matter what you’re selling, there are a few important formulas. Profit is always revenue minus the cost of goods you’ve sold. You need to know how much profit to expect in order to grow and scale your business. If you don’t budget enough for goods, you’re not going to see any profit. If you budget too much, you’re going to waste startup capital on things you don’t need yet.
In order to calculate your costs, you need to add together what you spent on materials, what you spent on labor, what you spend on shipping and inventory in creating your goods, any expenses you’ll encounter with a production facility, as well as overhead associated with all of the above. That’s going to be your startup cost for goods.
Will You Use Third Party Providers or Build Infrastructure?
Third party providers are excellent for many services. You’ll find that there’s a B2B company for virtually everything you need. Some businesses prefer to have their own infrastructure for a variety of things. Sometimes it’s for the purpose of confidentiality, and other times it’s because it’s cheaper in the long run. The initial investment for infrastructure (like dedicated servers, a privately controlled phone network, or any other large service a business requires) is very expensive. It only pays off later on.
This is why many businesses start with third party providers, and if they feel the need to, will graduate to strictly in-house solutions later on. Doing so makes the initial investment a little easier to digest and leaves the rest of the process up to scaling.
How Do I Determine How Much My Business Will Cost?
While you can research startup costs for comparable businesses, you’ll only get an accurate number by writing your comprehensive business plan and creating a long list of everything that might cost you money. Then, give yourself some substantial padding on that number.
If you’re a budding entrepreneur, the business proposal, not to be confused with the business plan mentioned above, is one of the most important documents you need to learn how to write. That knowledge will set you apart from other people and prepare you for launching a business on a steady path to success. Click here to learn how to write a business proposal that will help you actually generate leads.
Assumptions are dangerous when it comes to startup costs. Too little and you’ll never get off the ground. Too much, and you’re saddled with a wealth of debt that you’ll need to repay. It’s best to take your time making your calculations to reduce the potential for error.