Estimating Realistic Startup Costs

When you start your business, you need to try to estimate what your startup costs will be. It is complicated but a necessary process to get your business off the ground successfully.

What are Startup Costs?

Startup costs are expenses incurred before the business is running. You should know that startup costs are not a universally accepted or carefully defined concept. Startup costs are defined as expenses you incur and assets you need before you can begin to launch the business.

Why Calculate Startup Costs?

Estimating startup costs is a key element in your financial plan of your business. Understanding what it is going to take to start your business can help you:

• Attract investors and secure loans
• Estimate profits
• Conduct a breakeven analysis
• Identify potential tax deductions
• Extend the runway of your business

When business owners underestimate startup costs and do not make a plan, it might work in the short term but is more difficult to maintain. Every business and industry require different expenses which means there is no easy way to calculate startup costs. However, what you can do is make an educated guess that accurately reflects the needs of your business.

Just like when you are developing your business plan or forecasting how much sales you will make, it is a mix of market research, testing, and just informed guessing. It is up to you to adjust accordingly based on the actual results over time.

Startup Expenses

These are expenses or upfront costs that can happen before you launch and start bringing revenue in. they can be split into one-time and ongoing expenses and when you separate them you can get a more accurate estimate of what it is going to take to launch your startup business. The following are some common expenses to consider in both categories.

One-time expenses

• Permits and licenses
• Incorporation fees
• Logo design
• Website design
• Brochure and business card printing
• Signage
• Down payment on rental property
• Improvements to a location

Ongoing expenses

• Rent
• Payroll
• Taxes
• Legal services
• Insurance payments
• Loan payments
• Utilities
• Marketing costs

These are just some examples that you need to consider. Some of these expenses will be fixed and others will be variable.

Startup Assets

These costs are associated with long-term assets purchased in order to start your business. Some of the common assets you need to invest in might be:

• Vehicles
• Starting inventory
• Office equipment
• Office furniture
• Tech equipment

You need to separate costs into assets and expenses. Expenses are deductible against income, so they reduce taxable income. Assets are not deductible against income. By separating the two you will save yourself some money on taxes. By accounting for expenses accurately, you can avoid overstating your assets on the balance sheet. Having more assets looks good but if they are useless then it just makes everything else look inaccurate. It is good practice to list these out separately when starting a business and leads into the final piece to consider when determining startup costs.

Cash Required to Get Started

Cash requirements is an estimate of how much money your startup needs to have in its checking account when it starts. Your cash balance on the start date is the money you have as a loan or investments minus the cash spent on expenses and assets.

Many business owners decide they want to raise more cash than they need so that they have money left for contingencies. You can find experts that will recommend you should have a set amount of expenses as your starting cash. It is great for peace of mind, but it is rarely practical and interferes with the estimates.

You need to calculate the deficit spending you will incur in the early months of your business to have a better estimate of what you need as starting cash balance. Then you can estimate how much cash you will need to move forward until you hit a steady break-even point months or years after opening up the business.

Things to Consider When Estimating Startup Costs

Pre-launch vs normal operations

The launch date is a defining point. Rent and payroll expenses before launch are considered startup expenses. After launch they are considered operating or ongoing expenses and many companies include payroll expenses before launch so that they can hire people to train before launch, create their website, stock shelves and more.

The establishment of a fiscal year plays a role in the analysis. It is convenient to establish the fiscal year as starting the same month the business launches. In this case, the startup costs and funding match the fiscal year and they happen in time before the launch and beginning of the first operation fiscal year.

Consider Startup Financing as Part of Your Startup Costs

Startup financing is not part of the starting costs, but you do need to estimate the starting costs and determine the financing to pay for them all.

Consider the following financing options for startup costs:

• Investment: what you or someone else puts into the company.
• Accounts payable: debts outstanding or need to be paid after a certain time according to your balance sheet.
• Current borrowing: standard debt, borrowing from banks, Small Business Administration, or other borrowing.
• Other current liabilities: liabilities that do not have interest charges. This is where you put loans from founders, friends, and family.
• Long-term liabilities: long-term debt or long-term loans.

The Bottom Line

Make sure that you have considered every aspect of your business and included any related costs. You will have a better chance of securing loans, attracting potential investors, estimating profits, and understanding the cash runway of your business. The more accurate your startup costs are and make adjustments as needed, the more accurate vision you will have for the future of your business.