Estimating start-up costs.
Starting a new business is exciting, but it’s also a significant commitment. It requires time and money, and it could be a while before your business starts to return a profit. Also, it’s common to underestimate the actual amount of money needed to start a new business. To reduce some of the financial pressure, we recommend reviewing the various costs you’ll likely need to cover in order to get your business going. Getting an estimate of these will help you determine what working capital you’ll need to get started.
Every business will have different start-up costs to consider, depending on whether you’re:
- Starting a brand new business
- Buying an established business
- Buying a franchise
The different costs to consider include:
Your capital costs may include items such as:
- Equipment and machinery
- Office equipment like computers, scanners, printers and photocopiers
- Office furniture, supplies and other incidentals
- Fees for licenses, software creation or permits
Put together a reasonable estimate of the costs involved in starting your business. Once you estimate how much you will need, it will be easier to determine whether you can cover it with your savings or if you need to seek a small business loan or other financing options.
While you may be able to estimate most of your anticipated start-up costs yourself, there may be instances where you need to seek professional advice as part of your research. Your research costs may include:
- Adviser’s fees for business models
- Accountant's fees for information on business structures and tax
- Legal fees for intellectual property protection
- Market research consultancy for identifying targets and proof of concept
Your fixed costs are expenses you need to pay regardless of the amount of sales you make, products you produce or how busy you are. They tend to be recurring charges, and are often referred to as overhead costs, such as:
- Wages and salaries or even contract payments, depending on the makeup of your workforce
- Power and utilities, such as electricity and phone service
- Rent or mortgage repayments
- Web hosting costs and server space for your website
- Internet shopping cart subscription fees if you need to sell your goods or services online
Your variable costs are costs that can change based on your business output. These costs may be affected by seasonality (such as produce) or volume purchased (retail stock). Common variable costs include:
- Raw ingredients
- Production materials
- Stock orders
It’s generally a good idea to be conservative by overstating rather than understating your estimates.
In addition to your estimates, consider adding 20% for costs you haven't thought of in addition to cost overruns. You might be surprised at how quickly unforeseen costs add up.
Remember to shop around.
When you’re shopping for the expected cost of the materials you need, look for ways to save money. Buying new equipment or machinery might be nice, but it may be more cost-effective to look for secondhand items. You may also want to shop around for different prices from various suppliers. For example, you could negotiate a better package price for your business' phone and internet costs or gain a better insurance policy at a lower premium cost.
Total these different costs and place them into a spreadsheet to help you estimate the approximate overall start-up costs you’ll face. This will help you determine how you will finance these costs, from either your own money, through loans or a combination of sources. Preparing these numbers now can help you enter into your new project with confidence.