So, you’re an aspiring entrepreneur with a killer business idea and plenty of hustle. You know you’ve got the skills and the ambition to succeed. You might even have found the right business partner. All you need is some startup cash.
But … how much? How much will it really cost to start your business and keep it running while you build your revenue stream?
You can consult surveys and census data to get an idea of the “average” cost to start a small business, but your startup doesn’t have to be average. You need a budget for your business. Here’s how to make one.
Think about your budget strategy
There are two primary approaches here:
- Keep your budget as lean as possible until you’re bringing in revenue. This approach is a sound one for many startups because it allows you to test the market and adjust your business plan. It also reduces your need for startup funding. If you take this approach, you might start as a sole proprietor (avoiding incorporation fees), avoid inventory costs, work from your home, and find other creative ways to reduce common expenses.
- Focus on preparing your business for growth, spending more (within reason) to do so. You might choose to spend more during the startup phase to prepare your business for growth. This could be a good approach if you (or a co-founder) have experience running a business, you’ve already researched your target market and developed your product, you want to scale rapidly, and you have sufficient financial resources. If you take this approach, you might form your business as a corporation, invest more heavily in equipment, marketing, and payroll early on, and take other specific steps to accelerate growth and revenue.
Taking a moment to think about your overarching budget strategy now — before you get started — will make it easier to handle all the small financial decisions that crop up down the road.
Estimate initial startup costs
This category includes the one-time expenses that you’ll incur before making any revenue. For example, incorporation fees, market research, attorney fees, equipment, and initial inventory. Here’s a list of common startup costs to consider including in your budget.
- Research and product development: Before you start a business, you need to decide what product you’ll be offering and who your clients or customers will be. You’ll also want to confirm that there’s a sound market for your product. You can pay external consultants to help with this work or you can do it by yourself, but there will be costs (in time, money, or both) either way. Take some time now to write out your research plan and account for any expenses in advance.
- Incorporating your business: If you decide to form an LLC or a corporation, you’ll pay a fee to the state when you form the business. You may also decide to hire an attorney to help with this process. If you decide to start your business as a sole proprietorship or a general partnership, you can avoid these costs but you lose the benefits an LLC or corporation, such as potential liability protection and tax advantages.
- Getting permits and licenses: Check with your state or local government (for example, the secretary of state or your county’s business department) to determine what licenses, permits, or other filings you might need to conduct business in your area. There’s usually a small fee associated with each of these documents.
- Buying or leasing equipment and workspace: You’ll need a physical place to work: an office, a retail location, a workshop, or a place to meet with clients. You might be able to work from home (which will help keep your startup costs low), but you’ll still need to outfit it with any tools you’ll need. For example, office furniture, a computer and software, machinery, and the like. You might also need a vehicle or other transportation. If you’re planning to hire employees or contractors, you’ll need space and equipment for them as well.
- Purchasing inventory: If you’re selling goods and you’re not dropshipping, you will need to keep inventory on hand. Make sure to budget for the costs of buying or making your initial inventory and then storing it.
- Making a website: Most businesses need a website. Luckily, there are many tools you can use to create a website easily and affordably: WordPress, Carrd, Squarespace, and Wix, just to name a few. If you need a website that’s more compelling, complex or customized, you might decide to hire an expert to give your site some extra sparkle.
Estimate ongoing expenses
In addition to your start-up expenses, you’ll need to estimate your ongoing expenses and make sure you’re able to cover them until revenue starts reliably coming in. It will almost certainly take time for your business to become profitable, so it’s wise to plan your budget at least six months in advance:
- Marketing: Your marketing costs may include advertising (such as print advertising, radio ads, online advertising, etc.), the ongoing costs of maintaining your website, and other marketing tools. For example, you may use a social media tool to post content and talk with customers, an email tool to send newsletters and emails, or design software to create appealing marketing assets. If you’re trying to keep marketing costs as low as possible, check out this list of useful and free tools.
- Payroll: No matter how small your business, you’ll always have at least one salary to consider — your own. It’s important to include your time, at a fair market wage, in your starting budget. If you are planning to hire employees or freelancers, you’ll want to factor them into your budget as well.
- Vendor payments: If you buy goods for resale, you’ll have to pay vendors for the goods themselves. If you make goods, you’ll have to pay for materials. Even some service-based businesses need to regularly purchase from vendors. For example, if you offer pet boarding, you’ll have to regularly pay vendors for food, treats, and other supplies.
- Shipping: This cost doesn’t apply to all businesses, but if you’re planning to ship goods you’ll need to estimate your shipping costs and include them in your budget.
- Consultants: Depending on the complexity of your business, you may want to hire a CPA to help you file your taxes or a bookkeeper to stay on top of day-to-day accounting. You might also hire an IT consultant, a marketing consultant, or other experts to help you with certain aspects of your business.
- Office supplies and printing: This is likely to be a relatively small part of your budget, but don’t overlook it! You may need to purchase office supplies or pay for printing materials like business cards, flyers, or posters.
- Insurance: Make sure to get proper insurance coverage to protect both your business and yourself from liability.
- Tools and services: This includes ongoing costs for software and services you use in your work. For example, if you’re a graphic designer you’ll probably have a subscription to Adobe Creative Cloud. If you’re a CPA, you’ll have professional tax preparation software.
- Travel: If you have to routinely travel for work, make sure to include travel costs in your ongoing budget.
- Payment processing: How are you going to be paid? If your clients pay you by check or direct deposit, you probably won’t incur any fees. Other types of payments, however, cost money. If you’re paid by wire, some banks will charge an incoming wire fee (Azlo doesn’t). If your clients typically pay with a credit or debit card, you’ll have to find a service (such as Square, Stripe, or PayPal) to process these payments for you. These services all charge fees, and those fees can add up quickly.
- Taxes: If your business is profitable, (which is the goal, after all), you’ll have taxable income. This helpful guide from Bench explains how to calculate, in advance, how much to set aside for taxes.
- Rent: If you rent a space for your business, such as an office or retail location, rent will be one of your ongoing expenses.
Let’s break it down by business type
Since this is a long, and potentially overwhelming list of potential costs, let’s break it down into a few example scenarios. There are a few basic costs that can apply to almost any business:
- Incorporation costs
- Legal and tax consulting
- Your salary and payroll
- Marketing and website
There are other costs, however, that are specific to the type of business you’re operating. Here’s a quick overview of the primary costs to keep in mind for a few common types of startups.
Common startup costs for a service-based business
Many service-based businesses (for example, consulting, home care and maintenance, pet grooming) can be started very cheaply. You don’t have to worry about inventory, shipping, manufacturing, and some other large line items.
There are a few necessary costs to keep in mind, however. Common expenses for service-based businesses are insurance, marketing, payroll, equipment, workspace, your website, marketing costs, and travel expenses.
Common startup costs for an e-commerce business
An e-commerce business, which is basically any business that sells goods online, can be extremely cheap to set up or very expensive.
Most of your costs will fall into the following categories:
- Product development
- Your website
- Marketing and advertising
- Payment processing
- Customer support
If you research the typical range of costs for each of these items, you’ll be able to calculate an accurate startup budget for your e-commerce business.
Common startup costs for a software business
To build a software company, you need to focus on development and market fit. That means your primary startup costs are likely to be research and payroll.
If you or a co-founder have software development skills, it will be easier to get started with a lean budget. If not, then research development agencies to find the right fit for your company and start getting quotes.
You’ll also need to budget for a website and initial marketing, and you may have other expenses including customer support and consulting fees.
Why a startup budget is worth the work
This is a long, and admittedly overwhelming, list of things to consider. If you’re feeling a little discouraged, take heart.
It doesn’t matter how big your budget is (or isn’t). Even if you’re planning to get started with almost no money, the process of creating a startup budget will help you plan for the future, find creative low-cost solutions, and build a stronger business plan. The budget itself will help you get through the first challenging months of starting your business.
Planning a startup budget is a lot of work, and we won’t deny it. But remember what we said at the start? You’ve got the killer business idea, the skills, and the hustle to succeed. You’ve got this.
Chelsea Hoffer is a writer at Azlo, an online banking solution for entrepreneurs, where she gathers and shares knowledge about building successful businesses.