Starting a new business is an exciting process. You get to see your germ of an idea start to take form and grow into a real enterprise. This business is an opportunity to do things on your own terms and build a team that you can trust and truly enjoy working with. With all of these hopeful feelings, however, also comes feelings of uncertainty and anxiety.
When you start a business, you need to think about the more complicated elements as well as the exciting ones. You have to consider how the business can be profitable in the long-term as well as the initial expenses of starting a business. If you can accurately account for both of these, you’ll be more likely to see success. If you’re just starting a business, you’ll first need to concentrate on the initial expenses so that you can be sure that you can afford to launch the business. The exact expenses you’ll need to consider will depend on what kind of business you’re starting, but there are many expenses that are common for almost every type of business. Let’s take a look at the common expenses of starting a business that any budding entrepreneur needs to know.
Practically every business is going to need to finance equipment of some kind. This will likely be one of the biggest expenses of starting a business that you face. Equipment for startups tends to fall somewhere in the range of $10,000 to $125,000, depending on the industry and the size of your company. This is a hefty price, but the right equipment can help make your business profitable in the long run. Many startups will get a business loan so that they can cover these significant expenses and plan to pay off the loan with the revenue that the equipment allows them to bring in.
As you’re calculating how much you’ll have to spend on equipment, consider how you can reduce your expenses without sacrificing the quality of your products or services. Rentals are a great way to do this. If you need a piece of equipment like a forklift to get the initial inventory into your warehouse and move it around, consider a forklift rental rather than a purchase. You may only need the forklift to do the heavy lifting at the beginning. Once you make some money, you can purchase a forklift if you think that you’ll need it for future operations. Renting equipment like forklifts can be a great option for a business that is just starting out and doesn’t have the cash to spend on major purchases.
Another way to consolidate costs on equipment is to have employees share any individual equipment your business operations require. Although you may be tempted to set up each of your employees with their own desks and computers, this can be expensive, especially if you have multiple employees. Instead, determine who can share equipment. If you have a few part-time employees, schedule them so that their shifts don’t overlap and they can use the same computer or work station. Once you start making money, you can set up each employee with their own equipment.
Whether you rent or buy, another significant portion of the expenses of starting a business will be the office or store space. You should plan on spending somewhere between $100 and $1,000 per employee per month. The larger you envision your business being, the more you can expect to spend on a workspace.
The decision to rent or buy will be completely based on your financial state as well as the state of the market when you launch your business. If you’re opening a dental practice and your realtor finds a great dental practice sale, you may want to snap it up rather than become stuck paying rent to a landlord each month. Of course, one benefit of renting is that you won’t have to handle any of the repairs or maintenance the space requires. As an owner, you will have to have the know-how of fixing problems with the plumbing or electricity as they arise or have connections that can help you. You will also have to front the repair expenses as the owner, while renters typically are not held responsible for the cost of repairs unless they caused the damage.
As you’re searching for office or store space, don’t make the mistake of choosing a space just because it is the cheapest. To have a successful business, you need to make sure it is in the right location and condition for your target audience. If your company sells marine building supplies, you won’t want to set up shop in a landlocked state. Not only will you be far away from your target audience that lives near the water, but you’d have to pay higher shipping costs to get your products to their seaside destination. When you commit to a space for your business, it needs to be somewhere that will boost your business rather than hurt it.
If you’ve calculated how much it will cost to rent an office or store space for the size of business you’re envisioning and it’s a bit out of your budget, consider working at home in the beginning. This can be a great alternative for startups that only have a couple of employees and don’t need a store to sell their products or services. You could also look into coworking spaces, which allow small businesses or freelancers to share office space with other professionals for a fee. If you have a service-based business, consider traveling to your clients at the beginning and setting up a space for them to come to you once you have the proper funds.
While businesses that only provide a service may not need to worry about inventory startup costs, any business in the retail, wholesale, manufacturing, or distribution sectors will likely need inventory to sell right away. Getting your product ready for sale or distribution as quickly as possible is important for getting money coming into your business right away. Depending on your industry, you should plan to allocate 17% to 25% of your total budget to inventory.
The tricky part of budgeting for inventory is determining exactly how much inventory you can carry. Too much inventory can lead to it becoming spoiled or damaged but too little inventory could cause you to lose customers who don’t want to or can’t wait for it to come back in stock. When you don’t have enough inventory, your customers can easily turn to your competitors to get what they need. This is especially true in budding industries, such as the cannabis industry. Cannabis delivery services are very popular in states in which they are legal. If you underestimate how much cannabis your delivery service will need, you risk losing customers to the many other delivery services out there. With too much cannabis stocked up, you risk the product dipping in quality and then displeasing customers who purchase it.
Although this is a tricky line to walk, you should err on the side of having too much inventory. Skimping on inventory can mean that you’ll turn customers away. As you haven’t had the time to build a relationship with the customer so that they can trust that you’ll have the product soon, they may never return to your business if you can’t provide it immediately. If you’re worried about your product spoiling or becoming damaged, try to think of creative ways that will allow you to preserve its quality for as long as possible.
We already discussed the costs of renting or buying a space for your startup, but another one of the expenses of starting a business that is related to the workspace is the cost of utilities. You’ll be responsible for paying for the gas, electric, water, phone, and internet bills. In general, you can estimate spending about $2 per square foot of your total office or store space for utilities.
This estimation will apply to your space whether you’re renting or buying. Keep in mind that if you need to install an HVAC unit in your space, you will have to budget for that expense as well. The cost of commercial AC installation can be rather high, especially if your space is large and you need a larger unit. You’d also need to factor in the cost of upkeeping the unit once it’s installed.
If you’re buying a space and setting up utilities, like the HVAC unit, think about how you can make the systems more energy efficient. While the initial installation of energy-efficient systems might cost more than what you expect, you’ll see long-term savings with lower utility bills. For instance, you could look into commercial solar installation to power your space’s electricity. While installing solar panels can be pricey, you’ll avoid high electric bills through traditional utility companies and you’ll know that you’re making as little of an impact on the environment as possible.
You protect your home, health, and car with insurance and need to do the same with your business. There are many different types of insurance for businesses, from disaster insurance to cover the costs of damage from a fire or storm to insurance that can protect you against angry customers who want to sue you. The exact type of insurance you need will depend on your business, industry, number of employees, and a variety of risk factors.
No matter what type of business you’re starting, there are a few essential forms of insurance you should consider to protect yourself. First, there is general liability insurance. The cost of this insurance is between $400 and $800 every year, depending on your industry’s riskiness. You should also get workers’ compensation insurance. This will cost about $0.75 to $2.74 per $100 of payroll, depending on the business’s size, location, risk, and payroll. While you may not want to think about any of your employees getting injured on the job and needing compensation, it’s better to have the insurance ready for this scenario than to be faced with the employee’s workers compensation lawyer seeking reparations that you can’t provide. Commercial property insurance is also important for this reason, as it will protect the value of your property and its assets in case anything happens to it.
Overall, startup insurance can range anywhere from $500 to $3,000 per year. A study from Insureon found that the average small business spends about $1,282 per year on all types of insurance. If you feel like you’re out of your depths trying to decide what insurance you need, be sure to speak with an insurance professional. They’ll know which types will apply most to your business.
Payroll is going to be one of the biggest expenses of starting a business. You need to pay your employees from the very beginning, even if you’re not making much money. You will also ideally be paying yourself as well with that revenue. Keep in mind that payroll will include benefits and all forms of compensation, such as stipends, commissions, overtime pay, and bonuses. Your staff is also likely to grow over the course of the year as business starts to pick up, so you will want to be sure that your payroll budget can cover any additions to the team.
You should expect the payroll to take up 25% to 50% of your total budget. The exact percentage will depend on the size of your business and the industry standards for pay. If you plan on using a payroll service, like many startups do when they don’t have the resources for their own HR department, remember to factor the monthly cost of that service into your expenses of starting a business.
If you’re concerned about the payroll accounting for too large a portion of the expenses of starting a business, try to find ways to lower the number of employees you plan on having for your startup. Rather than having an IT department of your own, consider outsourcing IT to a third-party business. You’ll have to pay for their service, but you won’t need to worry about accounting for them in your payroll and benefits calculations. You can also look into hiring mostly 1099 contractors who won’t be on the company’s payroll. This is an option many startups choose in the beginning until they get enough funds to keep full-time employees on the payroll.
These are just some of the primary expenses of starting a business. You will undoubtedly come across many other expenses of starting a business as you get it off the ground. Remember to weigh each expense and consider whether its price is worth it for the success of your business. You might be hesitant to pay for things like going to a business coaching conference or an informative conference for your industry, but these gatherings can be invaluable opportunities to improve your skills, become a better leader, and make connections with other entrepreneurs in your industry. Remember to always make decisions that are in the name of bettering your business and you won’t become overwhelmed by the expenses of starting a business.