Starting a new business or franchise can be very exciting. However before you take the leap, it’s important to understand and calculate the costs involved. Not only are there are a variety of expenditures and fees for the launch of a startup, there are also ongoing expenses to take into account to keep your doors open long-term.
According to the Kaufmann Foundation (known for its entrepreneurial research and education), it costs on average $30,000 to open a new startup business. Home-based businesses can cost on the lower end, but many other types of businesses cost a great bit more. Every business is different, but most require similar costs that need to be figured into the startup cost of the business or franchise that you are considering.
Many entrepreneurs underestimate startup costs. In fact, undercapitalization (or insufficient funding) is the top reason why businesses fail, according to the Small Business Administration (SBA).
In order to avoid undercapitalization, here is a list of things to consider as you plan your startup business:
- Equipment and supplies – This includes office furniture and equipment, machinery, computers, telephones, software, etc.
- Consulting fees – Some new companies incur expenses for legal work or accounting.
- Marketing – Logo design, website, brochures, grand opening promotions – all these are options you should be considering when you start a business.
- Insurance, licenses and/or permits – Insurance companies may require you to pre-pay insurance for your business. Depending on your business you may also need to obtain a business license or permit as well.
- Security deposits – If you’re renting, you may need to pay a security deposit for property and/or utilities.
- Other – If you plan on starting a franchise, you will likely be required to pay a franchise/licensing fee. You may also need to purchase inventory. Or, if you are securing a loan, you may need to pay an upfront fee to the bank to secure the loan. Maybe you need to spend money on market research to help you narrow down your product or service selection, and identify your target audience. Or, you may need to allocate dollars into site selection and/or improvements.
- Salaries – This includes wages, salaries and benefits (if offered) for you and all of your employees.
- Marketing – You’ll need to continue to let potential customers know about your business and entice them to do business with you. Whether you focus on internet marketing, social media, television, radio, fliers, or other methods, you should include it in your ongoing budget.
- Rent or mortgage – Whether you rent or own a site, you’ll need to include this in your ongoing expenses.
- Financing – If you obtained a loan or other type of business financing, you’ll be responsible for paying the amount back with interest.
- Utilities and Internet/Cable/Phone – Electricity, heat, sewer, water, internet, cable, and phone are all monthly expenses you may need to account for.
- Insurance – You may need more than just business insurance. You may need cyber liability insurance or workers compensation. If you have a vehicle for the business, you’ll need car insurance.
- Other – Will you need an accountant? Do you need a vehicle to operate? Will you need to pay franchise royalties? It’s also a smart idea to set aside extra money for any unexpected expenses.
Understanding all of these startup costs is a huge first step in getting started as an entrepreneur. To help you adequately prepare, we’ve created a business planning calculator for estimating startup costs. Use it to better help you figure out the right amount of financing needed, as well as to plan for the business of your dreams.