Archive for September 12th, 2011

Business Start-up Costs

September 12th, 2011

Understanding what it will cost to start up a new business is a major factor toward the success of every business.  Each business start-up will have unique needs. A retailer might need a storefront and staff to operate it, plus inventory, while a manufacturer might need machine shop equipment and trained staff to operate it, plus raw materials and a warehouse. If you’re starting an online business, you might be doing it at home, may not need an outside facility and will have minimal operating expenses and possibly no staff at all.

It’s best to determine the financing and borrowing needs of a new business by estimating its start-up costs when writing the business plan. Business plan writing software, the US Small Business Administration and other organizations offer start-up cost worksheets to help identify these business expenses. Or with a basic knowledge of spreadsheet software such as Excel and the following set of example cost categories, you can put a custom worksheet together yourself. 

Costs for a start-up business can be divided into these sometimes overlapping categories:

Permits and Licenses
A start-up cost estimate must include funding to cover not only the business license and Fictitious Business Name registration and publication, but also the cost of permits, zoning and possibly a zoning variance. You may also have expenses related to refitting your place of business to satisfy licensing and regulatory requirements. For example, your business may have to conform to fire safety regulations and may incur the cost of fire extinguishers, sprinklers and exit signs.

Professional Fees
Setting up a legal structure for your business (e.g. LLC, corporation, etc.), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, etc., will require attorney fees. You may also need to engage the services of an architect or engineer, and retain an accountant and/or a tax advisor. Consider that some of these professional service expenses may be ongoing.

Administrative Costs
Administrative costs include anything else you need to have on a daily basis to operate a business including express shipping and postage, and a wide range of office supplies, and other consumables.

Insurance
There is no better protection from the unforeseen than to have the full and proper insurance coverage in place. You will need liability and property insurance to protect yourself and any business assets. Some businesses also require workers’ compensation, health, life, fire, product liability and professional malpractice insurance. Check what you need for the kind of your business.

Depending on your type of business this could be a considerable expense, or maybe not.  If you are starting a typical home-based service business your renter’s or homeowner’s insurance may cover your business equipment, supplies and inventory. But it’s best to be cautious and check your policy coverage with your insurance agent before you open for business. Often a small additional fee, perhaps $50 or so, will purchase a rider for your policy that will cover such equipment as your computer, telephone and printer/copier.

Premises & Business Location
Some costs for a business location are considered one-time business plan start-up costs such as building renovations, down payments on a mortgage, construction costs and landscaping.

Other costs of having premises are monthly expenditures such as the payment of a mortgage or rent, utilities, parking, building and landscape maintenance, and office security. Also consider that you will need to buy office furniture including desks, chairs, filing cabinets, etc.

Technology Expenses
A cost effective and efficient company will leverage technology and must estimate expenses related to computer hardware and software, printers, copiers, telephones (both land lines and cell phones), PDAs, website development, optimization and maintenance, internet access, security measures, and IT consulting and training.

One-time expenditures often include the purchase and installation of computers and telecommunication equipment including networks, phones, and mobile communications gear. Monthly expenses can include equipment leasing or payments and technical support services.

Marketing, Advertising and Sales Expenses
Marketing and promotion are vital to the success of any business. All businesses should have advertising budgets based upon their business models. A marketing plan will help determine the exact costs required for a specific business model.

Advertising should be considered a monthly expense that can include the cost of Internet and print media advertising, postage for mailings, design and printing costs for promotional brochures and stationary, public relations services, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, plus related travel and entertainment.

Employee Expenses
Many business start-ups fail to include an estimate of the owner’s salary in their business plan start-up cost estimate. Omitting this important salary can cause undue stress during the first year, when the business may not be making a profit. Business owners should include a twelve month estimate of all employee costs, including salaries, payroll withholding taxes, worker’s compensation insurance, and benefits. Including your own.

Business Product
Businesses that sell a product must consider start-up costs for such items as initial inventory, vendor deposits, raw materials, manufacturing equipment, warehousing costs, product packaging, shipping, shipping insurance, and sales tax.

Businesses that provide a service must consider costs such as travel to client sites, mobile services and printing costs. Business product costs differ based upon the business product and business sales model. Writing a business plan will help to identify the start-up costs.

Operational Expenses
Operational costs should be budgeted out monthly. Estimate costs such as telephone, mobile services, Internet access, electricity and other vital services for a year, since the loss of any of them will directly affect the success of the business. Other operational costs include on-going , attorney and other professional fees, banking fees, credit card usage fees, and possibly transportation expenses.

Factor in the Time to Get Off the Ground
One critical component of getting an accurate start-up cost estimate is to determine the length of time it’s going to take you to open your new business. It will be very different if you’re opening a restaurant versus an eBay business. No matter what your business type, take into account everything you will spend, from the moment you begin the start-up process, through the moment you make your first sale. If you need three months from the time you sign a lease to the time you can put the open-for-business sign on your retail storefront, then calculate how much money you will need for salaries, electricity, rent and so forth, during those three months.

Learn the Specific Costs for Your Type of Business
There’s a wealth of resources available to you on the Internet that you can access to understand the specific costs associated with your particular business. For starters, engage multiple social media platforms, connect with other people in your industry, and post on message boards asking for help from fellow entrepreneurs.

Check out your industry’s trade association(s). There should be active members who are going through or have successfully navigated the start-up process, and they may be happy to share tips with you. You might even get access to sample business plans and checklists for your market niche, but most importantly, you’ll find out which hidden costs to be wary of in your industry.

Take every opportunity you can to network with business owners in your industry, both online and in person. They will have the best understanding of how the costs of a typical business in your industry balance out across the above categories. With that knowledge, you’ll be able to create a reasonable cost estimate for starting a business of your own.

Above all, be realistic when calculating your start-up costs. The first attempt to list out and calculate your costs may not be complete. Continue to research, consider your options, and refine your analysis until you’re satisfied with the final number, and then take the additional step of adding a miscellaneous line item for 10% of your total budget. The fact is, you’ll spend more than you expect to get your start-up business going, and the miscellaneous category will be there to cover the inevitable unexpected costs.