If you are thinking of starting a business, you must also be silently asking yourself: How much will it cost to start?
The cost of starting some businesses can be high while that of starting others can be far less expensive. It depends on what you’re starting, a micro, small or medium-size business. Even within these categories, start-up costs depend on the type of business.
If you are aiming to be a freshly-minted Small Business Owner, and this is your first business, calculating the cost of starting your business will be as comfortable as venturing into an unfamiliar territory.
This is why you will need a business plan to help you estimate the cost of starting your business, and the financial projections section is a key component of your business plan.
Your financial projections, from your first year through three to five years, will estimate your revenue and profit. More importantly, as a start-up, they will also project your expenses. With these, you can forecast the financing you will need to meet your initial expenses.
In this way, you will know how much capital you will need when you start shaking the financial bushes. Whereas some of your expenses will be recurring (like payroll, rent) and you will keep paying them every month or every year, others will be one-off, like cost of incorporation, furniture.
In estimating your start-up costs, it is advisable to provide for your first six months to one year, without counting on revenue within that period.
With the foregoing at the back of your mind, whatever the type and size of business you want to start, here are 10 items you must consider as you plan the cost of launching your business.
- Incorporation and Licensing Expenses: One decision to be made in the start-up process is the choice of a business entity.
If you choose to incorporate your business as a limited liability company, thereby making it a legal entity separate and different from you, you will need to file a memorandum and articles of association.
Depending on the nature of the business, you may also need to secure a licence from a Federal or State Agency.
While the Corporate Affairs Commission is responsible for incorporation of companies, a Federal, State or Local Government Agency will be responsible for licencing your business.
You must find out what your business requires to take off, whether incorporation or licensing, and factor these into your pre-operational costs.
- Office Rent: Unless you plan to work from home, in which case you will have to go to your clients all the time and your clients will have no need to come to you, you must consider the overhead cost of an office space.
Even if you choose the less costly option of a shared, co-working space, renting an office will constitute a major element of your fixed cost.
So, you must put a cost on your rent of office space.
- Furniture and Supplies: A modern office requires each staff to have a desk, a chair, a computer, and access to a phone.
Add cabinets, file shelves, printer, ink, paper, etc. and the cost goes up.
Just be sure to keep the score and know the cost.
- Utilities: After providing for payment of rent for office space, consider the cost of utilities: Electricity, internet, phone bills.
Assign costs to each and all of them.
- Equipment: These are tangible property, other than land or buildings, needed for the operation of your business; like machines, vehicles, tools and devices.
Equipment will vary by business. For examples, beside other equipment, a hair salon will need styling chairs while a restaurant will need ovens and cooking utensils.
A new business will need to cost and finance the acquisition of equipment before it opens for business.
- Inventory: Are you planning a service business? If yes, your start-up costs will not include inventory. You will, however, need inventory if your business will be in such sectors as manufacturing, distribution, wholesale or retail.
How much inventory to carry, for how long, will depend on your business. Whatever you decide will be a necessary addition to an estimate of the cost of starting your business.
- Marketing: Marketing expenses range from banners through business cards to advertising campaigns.
While there is a wide variety of options, from low budget to expensive, what is important is for the Small Business Owner to put a figure on how much the business plans to invest in marketing its products and services.
- Salaries and Wages. The payroll of the business includes all forms of benefits and compensation. Employees, yourself included, must be paid at the end of each month, not minding if the business has not started making money.
Project the wages and salaries for the business for multiple years and varying staffing levels.
- Consultants: At the start-up stage, you must resist both the temptation to do everything yourself or employing too many staff.
You must consider the option of engaging consultants to fill in the gaps in your expertise and experience, and outsourcing to them the assignments that will bloat the payroll if you use full-time staff. Outsource bookkeeping, accounting and legal work to consultants.
When you plan to engage consultants, count the cost in your start-up budget.
- Taxes: It is difficult to know how much to provide for tax for your new business, because that will depend on the revenue of the business, which is equally difficult to predict.
Nevertheless, when planning your costs, it is important to assign an amount to allocate to business tax, after deductible expenses.
It is advisable to work with professionals with experience in tax matters. They will help you figure what your business can deduct, so that it will pay as little as possible.
The bottom line is that estimating the cost of starting your business, by identifying elements of this cost, is a stressful but vitally important step into entrepreneurship. This essential effort helps to determine how much money the Small Business Owner will need to raise as equity and/or debt, and signposts how fast and far the business is likely to travel.
Click here if you need help in estimating your business start-up costs or finding financing for your start-up.