Running a business takes work, but it’s not always as hard as it looks. We find that most new business owners are often hesitant because they’re not sure what start up costs will be, not to mention how to figure out when they might break even or what’s all involved in making sure their business is profitable.
Today we’re sharing the same info we provide clients who are starting a new venture. They’re general rules of thumb but they’re a great start to figuring out what the start up costs will be for your small business.
Why knowing what it will cost helps you in the long run?
It seems like calculating start up costs is only for those that are risk adverse, but we’ve seen time and time again that those that figure out these start up costs, rather than those who just grab their business loan and start running, are more likely to be successful.
Totaling up the start up costs of your business helps you have a handle on your finances (and as accountants we think that’s a pretty good idea). Here’s how knowing your start up costs will help you:
- you’re better able to estimate profits
- you can secure loans – banks want to know the nuts and bolts of how your business will run
- save money with tax deductions – knowing your costs will help your accountant (or you!) come tax time
- you’ll be able to figure out when your business will break even and project profits
So what all goes into calculating your start up costs? We’re glad you asked.
Define Your Business Type
This sounds like something that you should be doing to figure out what licenses and permits you need. But it also plays into your overall business costs. When it comes to business type there are essentially 3 different categories. What category you fall under helps you figure out what expenses you’ll need to consider. The 3 general categories are:
- Brick and mortar
- Online
- Service
And the general expenses you’ll need to consider are:
- office space
- equipment and supplies
- communications
- utilities
- licenses and permits
- insurance
- lawyer and accountant
- inventory
- employee salaries
- advertising and marketing
- market research
- printed marketing materials
- making a website
Start Shopping Around
Once you’ve decided what business type your side hustle fits under and you’ve made your list of possible expenses, it’s time to start shopping around. You won’t be buying anything just yet, but it’s good to start pricing out what it all will cost. Check into plans for utilities, estimate rental payments for office space and equipment, and check into the cost of internet, phone, and printing your marketing materials.
Tip: A hidden cost includes hiring the individuals to help you with marketing, design, finances, legal, etc. It’s possible to do these tasks on your own, but it may not be worth your time. If you’ve got friends who already run small businesses ask them for advice – they may have some great recommendations on who to hire or even suggestions on how you can decrease your costs with DIY options.
Grab Your Calculator
If you’re into planning, you might want to sit down at a computer and work up a spreadsheet that shows costs by month. If not, you can leave that to your accountant or bookkeeper and just grab your calculator or put pen to paper. Here’s where we start totaling up numbers to provide you with a general estimate of your start up costs.
Tip: To keep things organized, split your expenses into 2 groups – monthly expenses and one-time expenses. One-time expenses are things that are only needed once, like buying equipment or hiring a designer to create your logo and business cards. These expenses can usually be deducted for tax purposes – SO SAVE YOUR RECEIPTS! Monthly expenses are employee salaries, utility bills and rent on your space. Count at least 1 year of monthly expenses when you’re tallying up your start up costs ( if you can afford to add in more than a year – all the better).
Making Connections To Start Your Business
If you’re taking on a larger venture, just dipping into your savings or taking out a personal or business loan probably isn’t going to cover your start up costs. Here’s where you’ll use your business savvy to make connections with investors or secure a loan with the bank. Having your projected start up costs organized will make you look professional and on top of your game, not to mention it’s proof that you’ve got your ducks in a row and that makes investors feel comfortable.
Tip: Create a formal presentation of your start up costs as well as include the spreadsheets to those that you’re hoping will invest. Keep things clear and simple. Most investors and loan officers want to see start up costs and then compare those to projected revenue before making their decision.
Now that you’ve got a general idea on how to calculate start up costs you’re ready to start planning. Happy small business starting!
