Aspiring entrepreneurs need to know several very important things before starting new businesses. First, they have to know what kind of business to start and how their strategy will achieve success. But that’s just the fun part. Once these thrilling brainstorming sessions come to an end, you must now determine your business’s startup costs.
The average company’s startup costs have only increased as of late. But that doesn’t mean your new business will undeniably cost you tens of thousands of dollars in its first year. Many successful startups found their footing with much less funding at their disposal.
It all depends on which resources your business model requires and how much you’ll have to spend on each one to reach your goals. Answering both questions becomes much easier when you know how much the average business spends on essential expenses.
We’ve compiled this information in this guide, which also shows how to save on these expenses and how to determine which ones you truly need.
How to Calculate Your Business’s Startup Costs
If you’re unsure about expenses, you might want to look into the various online templates designed to generate estimations for business startup costs. These tools, like Gusto’s startup budget spreadsheet, can tell you how much capital you’ll need to cover initial expenses.
This includes your various recurring expenses, like rent, payroll or marketing. Ideally, your business will earn enough revenue to continuously cover monthly, quarterly, or annual costs. But at this stage, you can’t guarantee that your business will earn revenue at all, at least during its infancy.
For this reason, you should assume that you’ll have to cover recurring expenses on your own for at least six months. This way, you can devote 100% of your energy to attracting customers without worrying about how you’ll keep your lights on.
Essential Startup Costs: Full Breakdown
The following expenses apply to the average small businesses, though the spending amount varies tremendously from industry to industry. Thus, we based the accompanying range on the logical minimum and maximum you should spend on each expense.
If you choose to register your business as an LLC, you’ll have to file articles of organization with your state and pay the required fee. This fee can range as low as $50 and as high as $725 but most states charge under $300. Sole proprietorships do not have to register with their states and therefore have no such fee.
Licenses and Permits
All businesses need at least one license: the local business license. Without this license, you cannot legally operate your business within your town’s or city’s limits. You must apply to your local or city government and pay the required fee.
Most types of businesses must also obtain licenses to operate in their home state. This license allows the state to track your business’s revenue to ensure appropriate taxation.
Anything beyond these two licenses depends on your industry. Retail-oriented businesses, for example, must register for sales tax permits in order to collect, report, and pay sales taxes. Certain professions, like electricians, cosmetologists, and barbers, cannot do business in most states without occupational licenses.
You may have heard about the affordability of shared workspaces like WeWork. Rest assured, these did not earn this reputation from their monthly rent, which still ranges in the thousands for smaller businesses.
Instead, certain businesses view shared workspaces as good investments because in addition to your office, you get free desks, swivel chairs, Wi-Fi, conference rooms, and kitchens stocked with coffee and tea. But once again, if you’re just looking at price, you can’t exactly call shared workspaces “cheap.” So, regardless of which space you choose, you should still plan on spending approximately $1,000 per employee per month.
The high cost of renting office space suggests that unless you absolutely need the room, you should work from home in your business’s early stages. Countless successful businesses were started out of the owner’s home, largely because it took months before they earned enough money to pay rent.
Every business uses some form of equipment. This includes office-based businesses, which need computer monitors, wireless routers, etc. Nowadays, employees of young tech startups often use their personal computers as their work computers. In the past, the company had to pay for each employee’s desktop. It’s safe to say the tiny equipment bill of tech startups has made the idea of launching one dramatically more attractive.
Most other industries, however, have pretty steep equipment bills. The notoriously massive startup costs of restaurants, for example, stem largely from up-to-date ovens, freezers, dishwashers, etc. You can find similarly outrageous equipment bills everywhere from hair salons to doctor’s offices to auto repair shops.
Aside from industry, your equipment bill depends on the size of your team and the different types of employees you have. At the very least, you will probably end up spending $5,000 to $150,000 on essential equipment.
New businesses must provide exemplary customer satisfaction in order to get their foot in the door. It’s usually very difficult for retail, wholesale and distribution businesses to accomplish this without buying massive amounts of inventory. Such businesses should therefore plan to spend at least 25% of their overall budget on inventory, though that number will likely drop as the business grows.
Heavily seasonal businesses should spend the most because they have shorter busy seasons. If they don’t take full advantage of surges in customer interest, they won’t make enough money to carry them through the upcoming slow season. And when customers need their products, they need them right away. Rather than waiting for your business to order an out-of-stock product, they’ll just find it somewhere else.
This one really depends on your industry. Some businesses can spend close to nothing on marketing in their early stages. Aside from email campaigns and social media, they don’t necessarily need online marketing tools to attract customers. Many others, however, have to invest in paid advertising and video content to meet their industry’s standards. B2B businesses, for example, must make themselves accessible to potential clients because the average person has likely never heard of them.
But even members of the latter group can keep their marketing budget low by capitalizing on cheap marketing strategies. This includes blogging, incentivizing customer reviews, and good old fashioned networking. So, unless your industry demands the use of paid advertising, you can certainly draw tremendous attention to your business with less than 10% of your budget.
Much like marketing, the standards for websites vary dramatically from industry to industry. If your website just needs to provide basic information about your business, you may want to look into services like Squarespace or WordPress. These services can cost as little as $8 per month, and you don’t have to know anything about coding to build the site yourself. Most of them offer additional services, like email marketing and blogging, for higher monthly or annual premiums.
If your competitors’ websites stretch way beyond the realm of basic information, you should probably hire someone to build the website for you. This will likely cost significantly more than the aforementioned services. But as long as you choose the right designer, making your money back will pale in comparison to the rest of your rewards.
Furniture and Supplies
Shared workspaces and software tools have eliminated the need for things like microwaves, filing cabinets, water coolers and printers. As mentioned earlier, investing in the former also gives you desks and swivel chairs.
But accounting and project management software have their own costs, which typically depend on the size of your business. You’ll probably end up using more of these tools as your business grows. But for now, you won’t overspend as long as you only purchase enough office furniture and supplies to complement the amount of people on your team.
Regardless of your needs, no business should spend more than 10% of its budget on the two expenses combined.
If you rent your own office space, you’ll have to pay for electricity, water, Internet, heating, air conditioning, etc. HVAC units usually cost around a few thousand dollars, which does not include the cost of maintenance (HVAC units require regular upkeep). So, you should only install an HVAC unit if you absolutely need it.
Aside from HVAC, the rest of your utilities should cost about $2 per square foot of office space. You’ll probably pay less than that, however, if you don’t have an office phone bill.
In addition to industry, payroll depends on numerous factors. If you offer overtime pay, daily lunch or travel stipends, or bonuses, you must leave room for those things in your payroll budget. Many startups save on payroll by enlisting independent contractors (1099 workers), instead of traditional W2 employees. The technical definition of independent contractors implies fewer hours. But early full-time employees of startups may retain this status until the company grows solely because W2 employees cost more money in taxes and benefits.
Speaking of growth, the size of your team may change dramatically over the course of one year, especially in your early stages. So, if you plan on doing significantly more business throughout that time frame, you should also plan on expanding your team in the process.
For these reasons, two startups can have wildly different payroll budgets. At the minimum, you should keep payroll costs at approximately 25% of your budget. But once again, if your business grows rapidly and you distribute multiple forms of compensation, you could easily end up spending more than twice that amount.
This term refers to bookkeepers, accountants, attorneys, and other professionals that help you make important financial decisions, manage your finances, and remain legally compliant. Most business owners lack the knowledge and time to do these things themselves. Thus, when faced with unfamiliar tasks, you can avoid potentially hazardous missteps by simply asking for help.
Examples of such tasks include choosing employee benefits programs, preparing tax returns, and shopping for small business loans. You can leave all of this (and much more) to your certified public accountant (CPA). Finding the right CPA for your needs makes your life infinitely less stressful. Your CPA will prevent you from overspending in any area and tell you how to recover from unforeseen crises.
Attorneys enter the picture when it comes to legal issues like trademarks or filing incorporation documents. You may also need legal advice when developing business partnerships without formal contracts, especially when conflicts ensue.
How Much Should You Pay Your CPA?
As for compensation, CPAs and lawyers typically charge by the hour. Their going rates depend on the level of involvement they have with their other clients. Particularly laborious tasks may carry additional fees. So, before choosing professional consultants, lay out your expectations for their duties. For example, do you plan on meeting with your accountant every month, or only when tax season approaches?
If you only wish to hire an accountant for complicated projects, you’ll probably have to learn to complete basic tasks on your own. Thanks to accounting software, even the least financially-inclined business owners can become amateur bookkeepers. These tools can teach you to process payroll, create invoices, manage your general ledger, and more.
But regardless of how many tasks you outsource, the roles of your CPA and lawyer will increase over time. You might spend just over $1,000 on legal and accounting fees in your early years, compared to five times that amount later on.
Most states require businesses with employees to purchase workers compensation insurance and unemployment insurance. Some states add disability insurance to that list.
Though not required by state law, general liability insurance protects deals with extremely common misfortunes for certain industries. Let’s say one of your customers or vendors sustains an injury on your property or from your products or services. General liability insurance, which costs about $400-$600 per year, would help cover the costs of the lawsuit filed against your company. For this reason, industries with particularly high risks of injury, like construction or landscaping, basically cannot exist without general liability insurance.
Or, say another company sued your business on the grounds that one of your advertisements looks too similar to theirs. General liability insurance would help cover the legal costs of settling the claim.
Owners of brick-and-mortar businesses should at least look into commercial property insurance, which costs about $1,000 to $2,000 per year. This coverage protects your business’s inventory, equipment, and physical property from loss or damage. Applicable incidents include theft, fires, vandalism, explosions, and certain weather-related incidents. The typical package excludes severe natural disasters like earthquakes, floods or tornadoes, but would likely cover flooding damage from plumbing issues. You can pay to add coverage for specific disasters, though the typical package for your area should include the most common weather-related incidents.
Companies with high risks of property damage should also look into business interruption insurance. While commercial property insurance covers the cost of repairs or new assets, business interruption insurance accounts for the income you lose due to these incidents. Your insurance provider will likely allow you to add business interruption insurance onto your commercial property coverage.
All standard corporations, or C-corps, pay a maximum 21% corporate income tax. Regardless of how much money the corporation makes, it won’t pay more than 21%. Most other business entities pay income tax at the business owner’s individual income tax rate. This includes limited liability companies (LLCs), sole proprietorships, general partnerships and S-corps.
Owners of these businesses can deduct up to 20% of their income before determining their individual tax rate. It’s your CPA’s job to know what you can deduct and help you capitalize on your ability to deduct up to $5,000 in startup costs. The vagueness of this term allows businesses to apply it to all sorts of expenses. You can even categorize the money you spend researching different industries as “startup costs.”
How To Save On Startup Costs
Many small business owners would admit that much of their job involves finding new ways to cut costs or increase efficiency. Perfecting this skill early on will greatly diminish the likelihood of cash flow issues. So, once you have determined which expenses you absolutely need, consider how to mitigate those expenses and make wise spending decisions. The following tips can help you save money without compromising productivity:
Do More With Fewer People
There’s no denying the need for an appropriately-sized team. But before you hire another employee, ask yourself: could I just train one of my current employees to do this? Training current employees to perform additional tasks will almost certainly cost less than hiring new employees.
For example, instead of hiring a cleaning crew for your restaurant, you could pay your servers a little more to stay later on certain nights and clean the restaurant themselves. A retailer could pay a few sales associates a little more to manage inventory instead of hiring stock clerks.
Automation has become increasingly popular because it can help virtually any type of business make and save more money. Think of all the time you spend on monotonous, manual tasks, like sending pitch emails or invoices. What if you could spend this time on revenue-generating activities while increasing the output of these manual tasks?
For example, rather than composing and sending invoices yourself, you could use an invoice management system. The same concept can be applied to email pitches, which could bring in more business at a faster rate as well.
Use Business Credit Cards for Certain Startup Costs
Business credit cards have significantly higher spending limits than personal credit cards. They will also keep your business finances separate from your personal finances, which makes it much easier to track expenses. Using your personal credit card to cover expensive startup costs could wreck your credit score and severely inhibit your ability to access affordable business loans. Some cards even offer rewards for all sorts of business expenses, from office supplies to advertising.
Don’t Cut Corners On Startup Costs
As you can see, every business has certain startup costs it can skimp on and others that become major investments. Figuring out which expenses fit into either category will dramatically ease your concerns about your business’s financial health. Just do your research before making big purchases, and don’t cut corners on vital expenses just to save money. As your business grows, you’ll eventually learn how to only spend in proportion to the amount of revenue flowing in.