The Ins and Outs of Small Business Start-Up Costs
The Ins and Outs of Small Business Start-Up Costs

The Ins and Outs of Small Business Start-Up Costs

The thought of owning their very own successful small business is an exciting dream for a lot of people. The appeal of not answering to anyone, aside from customers, can be a real driving force for someone who wants to step away from a 9-5 job. Before stepping away from a stable income, however, potential small business owners need to take a step back and think about the actual costs to get started. We’ve compiled this handy list of financial considerations to think about prior to taking the big leap into ownership.

Before you can even start, you need to know these three things:

  • What is the product or service you want to sell?
  • Who will be your ideal customers or clients?
  • How do you plan to get the word out about your business?

Your startup costs will be driven by the answers to those three questions.

Not surprisingly, a company that provides a service typically is less expensive to start up than a company that provides a physical object. Starting a bakery will probably be more expensive than starting a consulting business due to the equipment, supplies, brick and mortar building, and inventory required.

How to Estimate Small Business Startup Costs

  1. Pick a budgeting tool. Being thorough when determining your operating budget is crucial to ensure you’re properly calculating all of your expenses and income. You’ll need some type of method that can help you stay on track. If you’re really old school, writing down expenses and income in a paper ledger can work. The old standby of plugging your numbers into a spreadsheet can also be a pretty useful but basic tool. A quick internet search will bring up many online tools that can not only help you keep an eye on your costs, but also send invoices, track time, and generate helpful reports.

  2. Make a couple of lists. When planning your startup costs, you’ll want to cover one-time costs and monthly costs. A good example of a one-time cost is having your internet service and computer network set up. Monthly costs are the essential expenses that keep your business running smoothly every month. Monthly costs include rent or mortgage payments, utilities, and the amount you pay to keep your internet service up and running.

  3. Speaking of rent. Determine if you even need a brick-and-mortar space for your business. Service-based businesses can often work from home, which provides an extra tax advantage if they have a space in their house dedicated to their business. If you have a product-based business, such as a clothing boutique, decide how much space you need for your main shop as well as inventory storage and back-office space. Also, as with any type of real estate, remember the importance of location, location, location. You can determine estimated lease costs by researching comparable properties online. Keep in mind that a commercial lease is priced per square foot. So, to calculate your monthly rent, you’ll need to multiply the listed price by the square footage and divide by 12. Important: When calculating your start-up costs, don’t forget the one-time cost of a security deposit and (typically) first month’s rent.

  4. Determine the monthly cost of your utilities. If you work from home, utility costs are baked in. And, as with the mortgage/rent information above, you can deduct a percentage of them on your taxes. When you lease a commercial space, unless you’ve negotiated otherwise, you’ll generally shoulder the additional monthly cost of utilities such as electricity, gas, and water.

  5. Will you buy or lease equipment? A café will require commercial kitchen equipment, seating, menus, etc. Our clothing boutique owner will need point of sale system, fixtures, signage, and décor. And the home-based graphic designer will need a desk, office chair, computer, and printer.

  6. Consider incorporation and licensing fees. Consult with an attorney and accountant to determine if setting up a legal entity is necessary. Regardless of business status, you’ll generally need to register with your state and city to set up shop.

  7. Budget for accounting and legal services. Like we said in #6, you’ll likely need professional legal and financial advice at some stage of setting up your business. An attorney can help with things like creating contracts and terms of service agreements. An accountant can help file your business, payroll and sales taxes. If you hire employees, they can also help you set up payroll.

  8. Get business insurance. It’s important to the survival of your business that you carry an insurance policy. Depending on the industry you’re in, your insurance costs can be quite inexpensive. For example, a marketing consultant will have a lower rate than a fireworks stand.

  9. Calculate how much inventory you’ll need. A few factors to consider when stocking up on inventory include:
    • How much storage space do you have?
    • What amount of monthly sales does your marketing plan anticipate?
    • Is there a minimum order your suppliers require?
  10. Research shipping costs. If you send products to customers, don’t forget to include delivery fees and packaging expenses such as padded envelopes, boxes and tape.

  11. Calculate your payroll. If you’re an independent businessperson, you’ll still need to pay yourself. But when you have even one employee, you’ll need to figure out your total payroll cost, which includes the payroll taxes that you’ll be responsible for as an employer. This is where the services of that accountant will come in very handy.

  12. Set aside 30% of your business income for taxes. Yes, you still need to give Uncle Sam his share of your earnings. This number can be tough to forecast because it’s dependent on revenue, expenses, and the type of business entity, but guidance from accountants generally suggests 30%.

Determining your startup costs is probably the least fun—yet the most critical part—of starting a business. But taking the time to do it will force you to pin down details of your new venture before you get started. Getting your business off the ground isn’t about making immediate huge strides forward. It’s the little bits of planning that can add up to your success.

Disclaimer: this article does not construe tax or legal advice. Please contact your tax advisor or attorney for specific guidance.

payroll software

More to Discover

Webinar: How to Drive Retention with Compensation Planning

Webinar: How to Drive Retention with Compensation Planning

Pay and Compensation play a critical role in employee retention and recruitment. Join Paycor's product team as we spotlight 3 reasons to consider a compensation planning tool that will allow you to create a strong compensation strategy that reduces turnover and helps attract the right talent. We will demonstrate how to get HR Leaders out of the weeds of admin and recordkeeping and providing managers with tools to make more informed decision about pay practices.

Webinar: Industry Focus - 8 Ways Manufacturers can Manage Costs and Prepare for Future Growth

Webinar: Industry Focus - 8 Ways Manufacturers can Manage Costs and Prepare for Future Growth

Manufacturers will always be an essential business. However, even as there is an unprecedented need for this key industry, many manufacturers are struggling: worldwide lockdowns have hurt demand while all-important supply chains have been badly damaged by factory shutdowns, particularly in China. In this webinar, Paycor will cover how HR and Finance leaders can work together to help make the tough decisions now to set their organizations up for future success.Speaker:Brett Beilfuss

How Businesses are Managing the New Reality of Work: A Paycor Survey

How Businesses are Managing the New Reality of Work: A Paycor Survey

COVID-19 changed the way nearly everyone works and left a lot of unknowns about how to budget and make plans to move forward. To understand exactly how coronavirus impacted medium and small-sized businesses and their workforces, Paycor surveyed nearly 600 HR and finance leaders.Did they need government funds? How many workers did they furlough or layoff? Are employees working from home now? How’s team morale? And perhaps more importantly, what are their plans for the future?This guide offer a pretty good idea of how business leaders are feeling, what keeps them up at night, and what approaches they’re taking to solve problems.

How Manufacturers Can Both Reduce Labor Costs and Add Value for Employees

How Manufacturers Can Both Reduce Labor Costs and Add Value for Employees

Your workforce is one of your largest expenses. It’s also your greatest risk. To be competitive, manufacturers need to be agile, responsive, and understand how to maximize their talent. Cutting-edge manufacturers are adding value to their employees by providing a workplace where they can grow and develop. They’re also wisely allocating labor costs to the projects and shifts that will maximize efficiency.Labor costs are the largest item on your balance sheet, so an effective cost-reduction plan should balance resources and cost control. While a reduction in force is typically the go-to action when discussing cost-cutting, it’s often not the best way. Replacing employees can be very costly, and lost institutional knowledge can take years...