A strong business plan is an essential first step to estimating startup costs. How much money you have to spend to get your venture up and running is a central question – so it’s crucial to have a roadmap. After all, it’s very common that startups will fail because they run out of resources in the lean years. This philosophy applies whether you’re starting your business with personal resources or with help from a creditor. In the first instance, you need to have a detailed estimate to make sure you have the capital to get your business off the ground. In the second scenario, you need to make sure you borrow enough to cover your startup costs. This is because if you run out, a bad credit rating or poor business performance could prevent you from borrowing more.
The key takeaway is that having an informed estimate of your startup expenses is essential to facing any unforeseen challenges. Without a plan, it’s unlikely you’ll be able to handle any curve balls – which, if you’re new to entrepreneurship, are bound to be thrown at you. However, estimating your startup costs needn’t be an intimidating task. In fact, a realistic estimate of your startup expenses is fairly straightforward. You need to break down your business into its fundamental components, then divide your spending into these lists. It’ll take a few educated guesses, but from here, you can get a ballpark figure for your small business startup costs.
Estimating startup costs: The 3 key areas
Your assets are the materials or equipment your business needs in the long term. For instance, if you’re opening a business with physical premises, you’ll need office furniture and storage. Or, if you’re opening a specialized business like an architects’ office, perhaps you might need drafting tables or a large-format printer. Equally, if you’re opening an online store, you’ll need to think about where you’re going to keep your inventory.
Which brings us neatly onto the next thing on your assets list – inventory. If you’re selling products, you need to think about your initial inventory purchase. If you’re opening a store, you need to calculate the cost of stocking your shelves. Equally, if you’re a manufacturer, then you'll need to add up the price of raw materials. However, if you’re starting a service business that doesn’t make or sell products, you can skip this step.
For every item on this list, make an educated guess as to how much it will cost. Be sure to do your research – if you can’t think of a price off of the top of your head, something as simple as a Google search can give you a rough idea. For example, visit real estate agents sites to estimate the cost of premises, or go to a comparison site to check out insurance plans.
However, there’s one important thing to know about estimating your startup costs. Although it seems logical to include computers and office equipment to your assets list, it’s actually not the case. This equipment is tax deductible as expenses, so most accountants recommend recording them as expenses as opposed to assets. We’ll introduce the difference between expenses and assets in the next section.
The second step when estimating startup costs is calculating what you'll need to spend on expenses. As we’ve explained, not every business purchase is an asset – some are expenses. A purchase is an asset if it provides long term economic benefit to the company, while expenses only relate to the current period. This is why things like office supplies are included as expenses as opposed to assets; to a degree, they are temporary in nature. Furthermore, these expenses aren’t always necessarily material. For instance, the legal costs of establishing an LLC are considered an expense. Equally, the cost of building your website or paying employees are also expenses. When added to your assets, these figures should give you a pretty good idea of your new business startup costs.
The final question is how you’ll go about financing a business purchase. On top of this, you’ll also need to calculate the working capital you’ll need in the early months to keep everything ticking over. One philosophy is that you need enough money to cover at least six months of expenses; however, in reality, this number will depend on the nature of your company. And, once you’ve got this number figured out, you’re well on your way to writing your complete business plan.
A good approach is to estimate a year’s worth of sales and expenses for each month. Next subtract expenses from your sales projections, as this will indicate whether or not you need to borrow extra money to keep things running smoothly. From here, you’ll be able to estimate how many months it will take for you to start breaking even. The amount you’re missing between startup and this point is a good indicator of the amount of starting cash you’ll need – and a solid step in the right direction when it comes to realistically estimating your startup costs.