There’s so much to consider when starting your own business. It’s kind of like an endless game of Twenty Questions.
- What are you going to sell?
- Who are you going to sell it to?
- How are you going to get the word out?
While the answers to some of these questions might evolve, there is one that you have to spend some considerable time on up front: How much money do you need to start your business?
Figuring out your startup costs is critical to making sure you have enough runway for your business to really take off.
In this article, I’ll show you how to estimate your business expenses when you’re just starting out as an entrepreneur.
Why you need to know how much it costs to start a business
The amount of money you need to open a business really depends on what you want to start. This is the general rule of thumb:
A business that sells a service generally costs less to start than a business that sells a product.
For example, starting a furniture business will usually cost more than starting a graphic design business because of equipment, supplies, space, and inventory.
Once you figure out how much you need to open your business, you can finally decide how you’ll fund it—from your personal savings, a friends-and-family loan, a bank loan, or from professional investors.
Being diligent about budgeting is important. Do your research on the types of expenses out there, take your time, and don’t rush. Your decisions rely on your data, so your numbers need to be realistic. Bad data could end up costing you more in the end.
How to estimate your startup costs
1. Pick a tool
To start, you’ll need a tool to help you keep track of all your expenses.
Spreadsheets are pretty common and useful for this sort of thing, but I know they’re not for everyone. You can use a classic pen and paper if you’re the type of person listening to a cassette type right now. Or even draw it out if that makes it easier for you to connect with the numbers.
Something like this works:
For each item (or group of items) below, estimate an amount, and then drop it in your tool of choice.
Now, let’s get into it.
2. Make two lists: One-time costs vs. monthly costs
It’s important to consider all the one-time costs required to get your business up and running.
A one-time cost is an expense that your business will incur only once. A good example is an installation fee your internet service provider might charge you for getting your office’s network set up.
Then, there are your monthly costs, which are required expenses to keep your business operating each month. A monthly cost is what you pay for that internet service every month.
Even though we’re talking about the cost of starting a business vs. running one, knowing the breakdown of each list is critical for any new business.
3. Decide if you’re going to buy, rent, or lease a commercial space
Do you need a physical space for your business?
Your total cost will depend on:
- What kind of business you run
- How much space you need and
- Where you’ll be located
A service-based business can get away with little to no additional rent by working from home. A product-based business isn’t so lucky.
For example, a business with a fleet of ice cream trucks will need to figure out where to park all the trucks.
Determine how much space you’ll need and where you want to be located. Then you can find the costs by looking up comparables online. Make sure you consider the one-time cost of a security deposit and first and possibly multiple months of rent.
A quick-and-dirty average price for commercial rent in the US is $30 per square foot, per year.
So for example, an office that’s 1,450 sq ft will cost $3,625/month in rent based on this estimate because:
$30 per square foot x 1,450 square feet = $43,500 per yearor$43,500 / 12 months = $3,625 a month
Of course, this general rule of thumb isn’t gospel. It varies across location and industry so make sure to do your research.
4. If you have a physical location, predict the average cost of utilities
When you have a commercial space, you’ll have the monthly cost of paying utilities, like gas, water, and electric.
The average cost of utilities for commercial real estate (roughly) is $3 per square foot, per year. So in the example above, the cost of utilities for a 1,450 square foot office, might look something like this:
$3 x 1,450 = $4,350 per year or $4,350 / 12 = $362.50 / month
Once again, this rule of thumb may not apply to every industry. If you have a business that uses indoor lights and lots of water because you’re growing plants, your utilities cost will be significantly higher.
5. Ask yourself if you need to buy, rent, or lease any equipment
Do you need equipment for your business? You should also consider whether or not any improvements need to be done for a space, piece of equipment, or automobile.
If I were to really start up my ice cream truck business, I’d need to buy, rent, or lease an ice cream truck. If I tried to save on the truck by finding one used, I’d need to consider how much improvements and repairs would cost.
Remember, equipment costs vary.
A new restaurant will need commercial-grade kitchen equipment and a photographer will need lenses, lights, stands, and a solid computer.
6. Add any incorporation fees you’ll have to pay
Does your business need to formalize right away and incorporate? If you’re planning on raising funds from professional investors or your business inherently has a lot of liability—say, a dog-grooming shop or a beverage company—it probably makes sense to set up a formal entity.
Paying for a service to have the forms completed and filed can cost as little as a hundred bucks to as much as several thousands. LegalZoom is on the lower end, while an accounting or legal firm, depending on their size and the specifics of your company, may be on the higher end.
Don’t try to do this yourself. Talk to an accountant and a small business attorney to get their advice.
7. Budget for legal and accounting services
And that brings us to our next point. Are professional services like legal, accounting, or consulting necessary as you get your business up and running?
That was a trick question. They probably are.
You’ll probably need a lawyer in some capacity. An attorney might be useful in writing your independent contractor agreement, employment contract, and service or terms of services agreements. If you have a business partner, you’ll most definitely need an attorney to draft an operating or partnership agreement.
And after you’re set up, you might need to consult with one to help negotiate the terms of some of your contracts.
Small business attorneys (generally) charge a few hundred dollars an hour.
Some attorneys might be able to give you a ballpark in terms of how many hours they’ll need to get you set up properly. I’ve also known firms that specialize in helping small businesses and sell services in packages.
You’ll likely need an accountant to file your business and personal taxes. If you sell a product and you collect sales tax, your accountant can help you file those too. If you hire any employees, your accountant can help you set up payroll too.
Some accounting firms will charge a flat rate for filing your taxes and hourly for additional services.
I’ve seen flat rates for business filings hover between $500 and $1,500 and hourly rates from $85 to $350. I’ve even seen startups pay five figures a month for very fancy accounting teams.
There are also bookkeepers who handle all your day-to-day business bookkeeping.
Outsourcing bookkeeping can cost between $50 to $100/hour, depending on your location. Smaller businesses might see fees in the few hundred a month, while bigger firms are in the few thousands a month.
As your business grows, you’ll have more to manage, so costs will go up over time.
Lastly, you’ll probably have some costs in the form of applications, software, or subscriptions for your contracts, bookkeeping, invoicing, and payroll services.
8. Get a quote for business insurance
The type of insurance your business will need depends on the industry you’re in, how many employees you have, and the type of company you run.
A business that puts on a traveling acrobat show will certainly have higher insurance costs than a graphic designer.
So the first piece in figuring out how much insurance will cost is knowing your industry and the types of risks you’re insuring for.
A study in 2017 found that 18,000 small businesses spent an average of $1,281 on business insurance policies, disregarding policy type; the median cost was $584.
9. If you sell a product, know how much inventory you’ll need
There are a lot of reasons why I think it’s important to get experience in the industry you’re trying to break into before starting your own business—and understanding the nuances of inventory is one of them.
From building relationships with suppliers to knowing the baseline of stock to keep on hand, all the Googling in the world isn’t a substitute for real-world experience.
Here are some factors to consider when stocking up on inventory.
- How much space do you have for storage (assuming you’ll store your inventory instead of drop shipping)?
- How much in sales does your marketing plan predict?
- What are your industry standards for baseline inventory?
- Is there a minimum order you must make from your suppliers?
10. Research your shipping costs
Make sure to account for shipping costs if you’re sending products to customers. Don’t forget to include packaging expenses as well, like padded envelopes or tape.
Depending on your product, shipping may cost a lot, so incorporate it into your estimate.
11. Calculate how much you need to pay yourself and your employees
Yes, you need to pay yourself and your employees, even when you’re just starting out.
Talent, also known as the people you hire, will be one of the biggest costs your business has. So don’t be shocked when it lands between 25 to 50% of your total startup costs.
A good way to estimate payroll taxes so you can calculate the total cost of an employee is to add 15 to 30% onto your employee’s salary.
Or you can use this calculator for a more precise figure.
12. Decide if you need office furniture and supplies
Just looking at the cost of a good-quality office chair (cough: Herman Miller: cough) is enough to convince any small business owner that coworking is the way to go.
If you’re setting up a traditional 9-to-5 office setting, you’ll need to take into account office furniture and supplies for every employee.
The furniture piece is easy to map out when projecting your startup costs.
As for your monthly supplies cost per employee, some studies cite quite a variance, ranging from $27 to $92 a month per employee, depending on the size of your business.
13. Budget for business and professional development
Business development can encompass a lot of different things. It could be meeting with potential suppliers or colleagues who can send you referrals. Or it could be attending conferences to expand your network. Small business owners usually need to learn new skills on the fly, so maybe it could include taking an online business course.
Whatever it is, budget for it. But don’t go overboard in the beginning.
Some other expenses that might fall into this category are books and courses that help you stay current in your industry. For some creative industries, even going to museums and watching films is a part of their process and development for ideas.
14. Account for travel expenses
If travel is required because you need to have face time with clients or scout locations, make sure you realistically account for it.
Don’t forget it isn’t just the flight, it’s getting to and from the airport, hotels and Airbnbs, and all the ground transportation. Plus, you’ll generally be spending more on dining out.
If travel is a big part of your business, consider using a credit card that gives you travel points to help offset this large line item.
15. Put aside 30% of your business income for taxes
Ah, yes, the bane of every small business owner’s existence: taxes.
This number is hard to predict because it depends on your revenue, expenses, and business entity.
In my experience, most accountants assume 30% of your business income will go towards taxes.
Figuring out startup costs is the least fun—yet most crucial part—of starting a business.
It’ll force you to pin down details like where you want to be located, how your marketing plan will impact your revenue, and how you’ll go about funding your new venture.
You’ll have to make lots of business decisions that may feel small at first.
But remember, getting your business started isn’t all about making giant strides forward. In the end, it’s a lot of little bits of planning that add up to something huge.