You've fine-tuned your small business idea and you're ready to create a business plan with a detailed budget, but you've never run a small business before. The next step is to figure out how much it will cost to set up your new business. Every business is unique and will have their own start-up costs.
Expenses can add up, so it's important to make sure you budget for each of them and calculate your start-up costs accurately. Knowing how much money you may need is important for planning and more important for securing financing if it’s needed.
Estimating your start-up costs is easier than it sounds. Here are some tips to help you calculate costs with examples of common small business expenses to help you create a budget and anticipate your start-up needs.
Common initial small business start-up costs
Almost all businesses have some initial start-up expenses in common -- most of which are one-time. For example, depending on the type of business structure you decide on, the costs can vary. If you decide to incorporate your company, you will have to pay a fee to do so, which will vary depending on if you decide to incorporate federally or provincially. You might also decide to hire a lawyer to help with the incorporation process, which could cost several thousand dollars in legal fees.
Depending on the type of business you want to operate, business owners may need to get certifications and licenses from municipal or provincial entities when they set up their small business. Maybe you need to join a professional association to help with getting business.
Consider the different kinds of insurance your business may need including property insurance, liability insurance, and disability insurance. For example, while you will save money when choosing a higher deductible, you need to make sure that you have funds to pay the deductible should something happen.
If you are opening a franchise, there will be initial franchising fees and other ongoing franchising and advertising costs associated.
If you are creating a new product or a line of products, you might need to patent your intellectual property, hire a product designer or engineer to design the product or pay to get production dyes or molds designed and made. Packaging design could also be a big expense—especially if you are selling a product with government regulations and you will need to consult with an expert.
Branding your company is also a common initial expense. For example, you might decide to get a website, logos, business cards, and stationary designed by a professional.
If need an office space, you might have some additional expenses including set up costs for internet and phone service, and possibly a mover to help get set up. There might also be painting and decoration costs to update the space.
It is important to account for any ongoing monthly fixed costs in your start-up costs. Monthly expenses include utilities, rent, mobile service, software subscriptions, cloud storage, social media management software, bank account fees, and more.
Some subscription services, insurance payments, cloud software, business tax payments, or professional fees require annual and/or monthly fees. These can be easy to forget since they can be irregular expenses but it's important that you factor them into your start-up costs, so you have enough money to cover them.
How much you'll need to spend on equipment could depend on what kind of small business you're opening. For example, if you're opening a consulting firm, you might need to purchase office equipment. But if you're opening a bakery, your equipment purchases will be significantly more.
Before settling on how much you need to spend, you may want to do market research into your industry to determine what equipment is needed and which equipment manufacturers have the best track records. You could start with researching information online and consider reaching out to similar businesses. Buying used equipment or leasing equipment can help to save on initial costs.
An important thing to know is that equipment purchases can be a deduction on your income tax. Some equipment is amortized over several years since the equipment becomes an asset. Consult with a tax professional to understand tax implications on equipment purchases.
If you're business is manufacturing products, there are lots of elements to consider when creating a budget.
Producing larger orders could help you save on per item production costs, but you may need to find storage space for the products not being shipped to customers or distributors right away. Also, raw materials can vary in price from one production run to another, or may be perishable, resulting in your profit margin varying significantly.
If you are not manufacturing the products yourself, you will need to take into account the lags that may occur between when you order products and receive them, often needing to put down a deposit for a portion of the costs of the order in advance of production. You will often need to order and pay for all or part of your next order months before you get any or all your money back from the first order because of production and shipping time lags. This will mean that you may need to build in enough working capital into your start-up budget to manage your supply.
One way to help figure out how much working capital you'll need, is to talk to people in the same industry who understand both manufacturing terms and customer payment terms in your product category. They maybe able to give you a better idea of how to manage your cash flow.
Other unexpected product related expenses are theft, return costs, loss from broken or defective products, unsold inventory, and delayed payments or returns from retail partners who don't sell through their orders.
Common ongoing variable costs
Unlike monthly expenses which tend to be fixed expenses, there are some common ongoing expenses for businesses that are variable. These can include paper, printer ink, office supplies and others office expenses. Your business might also need to pay for building or vehicle maintenance, or equipment replacement.
For businesses that are manufacturing and selling products, you may need to account for shipping expenses as well. If you manufacture and ship your products abroad, these costs need to be well researched.
Make sure you understand how much you will have to pay for brokerage fees, customs fees, and rush shipping charges.
Salaries and consulting fees
Whether you plan on hiring employees right away or just need to pay yourself, you'll have to include salaries, plus may need to include payroll taxes, employee training, and benefits within your start-up budget. While some business founders decide not to take an income from their business initially, that might not be an option for you.
On top of salaries, you might need to pay consulting or freelance fees for services that you won't be able to do in-house. These services could include bookkeeping, accounting, writing, or office support.
Some business owners also decide not to hire employees in their first year because they feel it is too risky to commit to an employee when they don't know how well their company will perform financially. Instead, they will work with freelancers. This could be an effective way to manage cash flow since you can assign a freelancer more or less work depending on how much capital you have available at any time.
If you borrow money to start your business, you will need to budget for both the interest on the loan as well as regular debt payments. The amounts that you will owe could be variable if you borrow money through a vehicle such as a line of credit. Or, you might have regular monthly payments if you have a small business loan or borrow from a friend or family member.
Build in a buffer
Operating a business without a reserve of working capital for emergencies could put yourself at risk. When you're getting started, there are probably going to be expenses that surprise you or come in higher than expected. Understanding your start-up expenses, will help determine what you need for a buffer. More is always better, but not always realistic.
Ask for help
If you're new to running your own business, you might want to seek out a mentor who has more experience in your industry. They can look over your budget and help you figure out what expenses you missed when calculating the start-up costs. We recommend you keep your business and personal expenses separate so it's easier to track and manage your taxes. Also, consider reaching out to a financial or tax advisor who can also provide guidance and oversight.
A complete picture of what things will cost, will help you plan to help protect you from being caught off guard.