One of the major reason of having a startup business plan is to answer the fundamental, and critical question of how much does it cost to start a business. Simple estimate of startup costs can help the founders to know the capital need of their business. This estimate can be done with an Excel template.
How Much Does It Cost to Start a Business?
There is no universal method of estimating startup costs as every business is different, and has its own capital need at the start. Some businesses ideas can be started on a smaller capital of D5,000, while others may require a considerable amount of cash like D200 million for commercial banks in the Gambia.
Startup costs are conceptually simple to prepare but requires some information research to get it right. The total cost to start business is the sum of the expenses that will be incurred before business operations start, assets the business need at beginning, and the working capital you will need to keep the business running during the first few months before customers buy and pay. This means that startup cost can be divided into three groups:
- Startup Expenses
- Startup Assets
- Recurring Startup Costs
You can download our free Excel Cost Calculator template.
1. Startup Expenses
Startup expenses are one-off expenses that will occur before the business start selling products or services. These expenses can also be called pre-operating expenses and it generally includes:
- Legal and regulatory cost: The monies you will pay to lawyers for establishing the business’s legal structure, as well as registrations fees, licenses, trademark etc.
- Insurance: This include any insurance premium you will incur before the launching date. For example, insurance of the stocks, vehicles etc.
- Staff cost: If you plan have few employees with you before the operational start, you need to consider their cost in the startup expenses.
- Rent advances: Unless you are planning to do home-based business; most landlords will require you to pay rent before accessing the building. Any rent that should be paid prior to operational start should be considered as startup expenses.
- Training: Important training that are required to start the business. It could be the training of employees or the business owner. It should be part of your startup costs if it will take place before the official start.
- Pre-opening marketing: Advertising and marketing expenses that will happen before operations start — It can be the radio or print adverts, brochures, online promotions or press releases.
- Office supplies and stationery: Chances are you will need some supplies in your new business. Paper, pens, business cards and even your paper clips. These supplies should be listed as startup costs.
- Consultants: Whether they consulted on business plan, marketing research, or technology, the costs associated with their services should be considered as part of your startup expenses.
- Misc. and other: Any other expenses associated with your startup should be included. For example, electricity deposits, phone services etc.
2. Startup Assets
Assets are tangible things like table, chairs, land, equipment, and sometimes intangible things like intellectual property, you own. Unlike expenses, assets are not charge to income statement. However, assets whose value declines over time can be depreciated. When the business started, assets will form part of your balance sheet. Common startup assets includes :
- Cash in the bank: In addition to the cash you will use to cover your few month expenses (before customer start buying), you might want some extra cash in your bank account. This money could be used as a reserve cash to cover any unforeseen expenses during the first few months of business.
- Starting stocks or Raw materials: If you will manufacture or sell products, you should include the money to be spend on the stocks needed to start operations. If you are starting a service-based business with no inventory, then ignore this point.
- Office furniture and fixtures: If you must buy some furniture before starting, you should include the cost here. Chairs, tables, filing cabinet, signboards, appliances, all fall into this category of startup costs.
- Leasehold improvements: This includes the major improvement cost for the office or store before the business start.
- Plant and equipment: This cost will depend on the type of business you are starting. If your business need to buy plants and machinery, then consider the cost here but a service or small business may not need it.
3. Recurring Startup Costs
One of the hardest part of startup cost calculation is the estimation of cash you’ll need to have in the bank as a working capital, to keep the business operating during the normal lean months. Lean month meaning the period just after the start of operation to period when sales grow enough to support the normal cash outlays of the business.
There are several theories on how to do this. Some people advice cash reserve that will cover up to six months operational expenses whiles others say a year is better. However, this depends on the type of business and it’s usually not that easy.
The differences between startup expenses and recurring startup expenses is that startup expenses are the expenses you would incur before starting business whiles recurring will be those expenses after starting business but before making enough sales to cover expenses. Failure to consider recurring expenses could lead to early burnout and of course cash flow issues.
For every item on this list or template, make an estimates of the amount and if you can’t estimate the price then do some research. For instance, call a computer seller to know the price of a computer or a lawyer to know the current business registration cost etc.
Who will finance the business?
The next step is to figure out the best source of finance for your startup. Here are some options to consider:
- Share investment: This could be your personal savings or fund raised from other investors.
- Borrowed money: Includes bank loans, credit card debt, loans from friends and family members. Be prepare to repay the principal with interest.
- Grant: You could also seek for help from government and non-governmental organizations through grants.
In conclusion, startup costs are the sum of what you will spend as startup expenses, plus what you need to spend to buy startup assets, plus the cash you need to have in the bank the day you open your business.
You can learn more about starting business in this free eBook.