You’ve got a great business idea and you’ve put together your team — now you need the capital to make it happen. But how much do you need?
A successful business starts with a plan. Part of writing your business plan is figuring out your startup costs and estimating how long it’ll take to start generating revenue and reaching the break-even point. That said, estimating your first year’s expenses will give you an idea of how much money you’ll need to launch your business.
Business expenditures can be divided into two categories: assets and expenses. You’ll need to calculate how much you’ll need to spend across both categories to understand your total startup costs.
Assets are resources your business owns and retain some value after a year or more of use. Assets vary — at a brick-and-mortar retail store, they might include fixtures, display cases and shelving. A software company would count workstations, conference room and reception area furniture among its assets. For any type of business, if you own the space you operate out of, the real estate itself counts as an asset as well.
Expenses are things your business spends money on and consumes, leaving no real ownership value after a year. Legal fees, salaries and contract labor, and taxes are common business assets. Rent paid on office space is also considered an expense.
Computers seem like business assets, but many accountants advise classifying them as expenses, due to the specifics of the federal tax code. The same holds true for other types of office equipment. Consult a qualified professional to find out what makes the most sense for your business.
List out every asset that’s essential for your business to have on hand at the beginning. If you’re selling products, that includes inventory. If you’re selling services, you likely won’t need much, if any, inventory.
Use exact costs when possible and do the research to make good estimates for everything else. Think lean — determine what’s essential to getting your business started and leave the “nice to haves” for down the road when you’re generating revenue.
Next, make a list of all the expenses you expect to have during that first year. Many small businesses incur the same types of startup expenses, so we’ve included a checklist of common ones in our startup cost calculator:
Every business will encounter both fixed and variable costs. It’s important to understand and account for both when calculating your startup costs.
Think about the difference between fixed versus variable expenses by how they relate to your overall production volume. While fixed costs won’t change as you produce more or less of your products or services, variable costs do.
For example: when a t-shirt company ramps up production, it needs to spend more on blank shirts, ink, packaging and shipping, and labor. Those are all variable costs. The print shop and the t-shirt print press would be fixed costs.
All startups will encounter both fixed and variable costs. The specifics of your business will determine how much you can expect your variable expenses to change as your business grows. Estimating these costs as accurately as possible is key to calculating your overall startup costs.
These are the costs you only pay for once. Examples include equipment, furniture and fixtures, fees, permits and licenses, and initial inventory and supplies. Down payments on real estate and expensive equipment also count as one-time expenses.
Think costs you can expect to incur on a regular basis, whether monthly, yearly, or on some other cadence. Examples include rent or mortgage payments, payroll, contract labor and services, utilities, supplies, and ongoing operating expenses.
Now that you’ve got a basic understanding of what kinds of expenses to anticipate, and how to categorize them, you can put that knowledge to good use. Here’s how to calculate your first year’s expenses:
Whatever your business model, a realistic assessment of expected cash flow gives your venture the best chance to succeed. Whether you need $1,000 or $1 million to get up and running, figure out where that money will come from before you get started. You’ll have plenty to do and think about without constantly worrying about running out of startup cash during those first months of operation.
You’ll need to secure funding to cover initial startup costs, whether it comes from investors, loans, or your own savings. Here’s an overview of some of the most common startup funding options out there — for a more in-depth analysis, check out How to: Finance Your SMB:
Paying expenses out of pocket. In return, you retain full ownership of your company.
Very similar to self funding, but usually refers to investing time and effort into your business, as opposed to money.
Selling shares in your company to raise funds is known as equity funding. A few types of equity funding common to startups include:
Borrowing money to finance your business is called debt financing. You’re taking on debt — loans — to pay expenses. The two most common types of debt financing are:
Most experts agree you should plan to cover the first six to twelve months of a new business’ expenses without relying on sales revenue. If things break the right way and you’re suddenly profitable three months into the game, all the better! But, unfortunately, most new businesses don’t develop like that.
Do your best to accurately forecast sales and revenue, and strive to meet those goals. At the same time, plan for a world in which revenue isn’t covering much of your expenses for at least the first six months or year.