How To Calculate Your Startup Costs
How much does it cost to start a business?
This is a common question most entrepreneurs ask once they have decided on the vision for their new venture.
Firstly, a start-up cost is the expenses your small business has before you officially start selling your product or service. Before the launch of your new venture, it is essential to plan your start-up costs.
Why should you calculate or project your start-up costs? This will ensure you prevent and limit any unforeseen expenses. It is difficult to give an exact figure for how much start-up costs may be, however, with the right preparation and planning you can avoid any major cost setbacks for your new business.
Learn the basics of calculating your start-up costs and how to correctly estimate your budget to successfully launch your new business.
Identify Different Types Of Startup Costs
Every industry and business is different. This means it’s important to recognise the different types of start-up costs that directly impact your product or service.
An educated and researched assumption can be based on whether your small business is classified as either a brick-and-mortar, online, or service-based organisation.
Understanding the specific bills and expenses for your type of business is the starting point to successfully calculating your start-up costs.
Common start-up costs for small business owners:
Brick and Mortar Business Start-up Costs
In the traditional model of business, brick and mortar businesses are face-to-face with customers, either in an office or store that is owned or rented.
If your new venture requires this type of model, your start-up costs may have high operating costs in comparison to online competitors.
A physical store allows customers to build a relationship with the brand, products, or services. However, in the growing digital economy, the lack of flexibility for customers may negatively impact your competitive edge.
Common brick and mortar start-up costs:
Licensing and permitting fees
Inventory for launch
Equipment and technology
Cleaning supplies and services
E-commerce Start-up Cost
The first e-commerce business can be traced back to 1982, by Micheal Aldrich introducing the world to electronic shopping when he launched Boston Computer Exchange. Online stores and services are becoming the norm for a vast majority of society.
An e-commerce business operates solely online, with the buying and selling of products and services over the internet. If your business requires commercial transactions over the internet, you can speed up your buying process whilst keeping operating costs relatively low.
Common e-commerce start-up costs:
Relevant licences or permits
Inventory for launch
Create Your Startup Costs Checklist
Like preparing a business plan, creating a list of start-up costs specific to your new venture will enable you to successfully estimate your costs.
Building an industry-specific roadmap or costs checklist will not only prevent the risk of unnecessary expense but help you stay on track of your bills and costs during tougher months.
Whether your business is online or face-to-face, accounting for the right expenses will create a firm foundation and starting point for your business.
Planning for future financial risks fuels the longevity of your new venture, and managing start-up costs early on is key to success.
Here are the top reasons to identify your expenses:
Increase your financial awareness
Stay on track with money management
Avoid unaccounted for tax costs
Maintain employee morale
Determine the profitability of your business
A one-time cost is a non-recurring expense that results in one isolated charge to your small business. One-time costs arise outside of your usual operating activity, making it unlikely to occur again.
Common fixed costs:
Permits and licenses
Downpayment on rent
Just as the name suggests, ongoing costs account for expenses, costs, and bills for the maintenance and day-to-day activity of your business. Also referred to as operating costs, daily administration and regular payments are expenses that your business must continuously manage and pay.
Common variable costs:
Costs of goods sold
Credit card fees
What Are Startup Assets?
A start-up asset, in contrast to start-up costs or expenses, is a long-term business asset needed to launch your venture.
It may be cash you have set aside to start your business, but a start-up asset accounts for anything valuable you had on hand when beginning your new small business.
Why should you separate start-up assets and start-up costs? In short, doing this can save you a great deal of money on taxes.
By carefully and accurately managing your different expenses you can avoid paying extra business taxes, reducing your taxable income.
Common start-up assets:
Cash on hand
Office furniture or equipment
Calculating Your Startup Costs
Now it’s time to officially calculate or make an estimation of your total start-up costs.
Don’t overcomplicate it, for good practice, start by creating a visual projection of your current and predicted expenses.
Creating a list of your specific start-up costs alongside a graphic presentation can work in your favour when it comes to securing funding for small business loans.
When your projections are displayed on a sheet, a bank or investor is more likely to grasp an understanding of the risks and financial gain your small business presents.
It’s important to set realistic start-up costs to show the long-term success of your venture.
Contingency is the term given to potential negative events that may occur in the future of your business.
Whether it is an economic recession or fraudulent activity, contingency is the planning for continued longevity for your business despite an adverse event.
Having a contingency plan in place is vital to overcome any unforeseen events that may present themselves.
Preparation is the key to success for small businesses, the purpose of a contingency plan is to minimise the negative impact on your employees and business health.
Protecting your resources and any customer inconvenience is vital for the recovery of your small business to return to daily operations as soon as possible.
Including a contingency plan in your business calculations can save you time and money because you will know how to effectively respond to any unpredictable incidents.
Frequently Asked Questions
- Are start-up costs tax-deductible?
Most company start-up costs are tax-deductible, reducing your taxable income. In the UK, the government and HMRC decide this by specific guidelines for start-ups to use pre-trading expenses for tax deductions. Find it here.
- Can you expense start-up costs?
Good news! You can expense the majority of start-up costs also referred to by HMRC as a pre-trading expenditure. This can range from training expenses to advertising expenses.
- Are start-up costs capitalised?
Not all start-up costs can be capitalised. This means you can’t present all start-up costs as assets on your balance sheet. Depending on whether you made the expense before the day you actively started trading your product or service.
- Are start-up costs a fixed asset?
When deciding if your start-up cost is a fixed asset, it is best to seek advice from an accountant to avoid any major tax inaccuracies. Usually, for small businesses, start-up costs can intersect with fixed assets such as accounting fees or recruiting costs. Take care by consulting an accountant to guide you on your decision.
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