How to Calculate Your Small Business Startup Costs
You’ve got a great business idea and you’ve put together your team — now you need the capital to make it happen. But how much do you need?
A successful business starts with a plan. Part of writing your business plan is figuring out your startup costs and estimating how long it’ll take to start generating revenue and reaching the break-even point. That said, estimating your first year’s expenses will give you an idea of how much money you’ll need to launch your business.
What are assets and expenses?
Assets
Expenses
Pro Tip
How to calculate startup asset costs
List out every asset that’s essential for your business to have on hand at the beginning. If you’re selling products, that includes inventory. If you’re selling services, you likely won’t need much, if any, inventory.
Use exact costs when possible and do the research to make good estimates for everything else. Think lean — determine what’s essential to getting your business started and leave the “nice to haves” for down the road when you’re generating revenue.
How to calculate startup expenses costs
Rent
Salaries
Fees, legal, and Insurance
What’s the difference between fixed and variable costs?
Fixed Expenses
Variable Expenses
Think about the difference between fixed versus variable expenses by how they relate to your overall production volume. While fixed costs won’t change as you produce more or less of your products or services, variable costs do.
For example: when a t-shirt company ramps up production, it needs to spend more on blank shirts, ink, packaging and shipping, and labor. Those are all variable costs. The print shop and the t-shirt print press would be fixed costs.
All startups will encounter both fixed and variable costs. The specifics of your business will determine how much you can expect your variable expenses to change as your business grows. Estimating these costs as accurately as possible is key to calculating your overall startup costs.
What’s the difference between fixed and variable costs?
One-Time Expenses
Ongoing Expenses
How to Calculate Your First Year’s Expenses
Now that you’ve got a basic understanding of what kinds of expenses to anticipate, and how to categorize them, you can put that knowledge to good use. Here’s how to calculate your first year’s expenses:
- Double-check to make sure you list one-time expenses only once.
- Be sure to account for every expected instance of ongoing expenses (Internet service, office expenses, etc.).
- Estimate when you’ll start driving revenue through sales. Remember that this can vary pretty significantly depending on the specifics of your business. For example:
- A one person consulting business with its first clients lined up might expect revenue within the first month or two.
- A manufacturing venture requiring lots of R&D and production time likely won’t anticipate any sales for the first year or more.
Whatever your business model, a realistic assessment of expected cash flow gives your venture the best chance to succeed. Whether you need $1,000 or $1 million to get up and running, figure out where that money will come from before you get started. You’ll have plenty to do and think about without constantly worrying about running out of startup cash during those first months of operation.
Where is your startup capital coming from?
Self Funding
Bootstrapping
Equity Funding
- Angel Investing
Angel investors back startups and other small, early stage businesses in exchange for shares in the company. - Crowdfunding
Crowdfunding lets individuals invest small amounts of money in a company, with the idea that lots of small contributions can add up to a significant fund raise. - Series Investing
Rounds of funding that startups take from venture capital firms, usually referred to as “Series A,” “Series B,” “Series C,” etc.
Debt Financing
- Small Business Loan
Many small businesses take out a loan, or multiple loans, to finance startup expenses. Banks, government agencies, and private finance companies offer multiple types of loans designed specifically for small business needs. - Issuing Bonds
A less common way for small businesses to finance startup costs is through the issuing of bonds. Investors purchase bonds, which function as a promise by the issuer (the company) to pay that money back, usually with interest, after a set period of time.
How to plan for your first year of business expenses
Most experts agree you should plan to cover the first six to twelve months of a new business’ expenses without relying on sales revenue. If things break the right way and you’re suddenly profitable three months into the game, all the better! But, unfortunately, most new businesses don’t develop like that.
Do your best to accurately forecast sales and revenue, and strive to meet those goals. At the same time, plan for a world in which revenue isn’t covering much of your expenses for at least the first six months or year.