Even with inflation easing in 2024, the rising costs that small businesses face present a significant challenge to success. That does not have to dissuade entrepreneurs from taking the leap and starting a new business. After all, new business startups continue at their torrid pace after setting a record in 2023, according to the U.S. Census Bureau.
But managing costs will be a major factor in whether your startup makes it. So whether you are looking to start a side hustle or are one of the tens of thousands of recently laid-off tech workers looking to launch on your own, here is what you need to know regarding costs. Follow this approach to breaking this mystery down and creating a clear picture of the funds that your startup business will need.
Startup cost categories
Bear in mind that different small businesses will have different types of startup costs. For example, a furniture retailer might need a storefront and staff to man it, while a toy manufacturer might need manufacturing equipment, a warehouse and staff that is trained to operate the equipment. And then again, if you’re operating an online retail business, you might be doing it at home in your PJs, and don’t need a facility or staff at all.
Costs for a startup business can be divvied up into six major categories:
- Cost of sales: Product inventory, raw materials, manufacturing equipment, shipping, packaging, shipping insurance, warehousing.
- Professional fees: Setting up a legal structure for your business (e.g. LLC, corporation), trademarks, copyrights, patents, drafting partnership and non-disclosure agreements, attorney fees for ongoing consultation, retaining an accountant.
- Technology costs: Computer hardware, computer software, printers, cell phones, PDAs, website development and maintenance, high-speed internet access, servers, security measures, IT consulting.
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- Administrative costs: Various types of business insurance, office supplies, licenses and permits, express shipping and postage, product packaging, parking, rent, utilities, phones, copier, fax machine, desks, chairs, filing cabinets – anything else you need to have on a daily basis to operate a business.
- Sales and marketing costs: Printing of stationery, marketing materials, advertising, public relations, event or trade show attendance or sponsorship, trade association or chamber of commerce membership fees, travel and entertainment for client meetings, mailing or lead lists.
- Wages and benefits: Employee salaries, payroll taxes, benefits, workers compensation.
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Factor in time to get off the ground
One critical component of getting an accurate startup cost estimate is to determine the length of time it’s going to take you to open your startup business. It might be very different if you’re opening a restaurant versus an eBay business. No matter what your business type, take into account everything you will spend, from the moment you dig in to the startup process, through the time you’re ready to sell a product or service. If you need three months from the time you sign a lease to the time you can put the “open” sign on your retail storefront, calculate how much money you will need for salaries, electricity, rent (and your mortgage payment!) during those three months.
Specific costs for your type of business
There’s a variety of resources you can tap into to understand specific costs associated with your chosen dream startup business. Start with the StartupNation Community, where you can search for other people in your industry, and post a message on the boards asking for help from fellow entrepreneurs.
Also make sure you check out your industry’s trade association. It should have an active group of members who are going through or have successfully navigated the startup process, and they typically will be happy to share tips with you. You might even get access to sample business plans and checklists for your market niche, but most importantly, you’ll find out which hidden costs to be wary of in your industry.
Take every opportunity you can to network with business owners in your industry, whether it’s online or in person. They will have the best understanding of how the costs of a typical business in your industry balance out across those six categories. With that knowledge, you’ll be able to create a reasonable cost estimate for starting a business of your own.
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Put all the pieces together
Once you’ve pulled together the costs for your startup business, find a solid cash management report template, which also helps you project your monthly cash flow.
Above all, be realistic when calculating startup costs for your new business. The first calculation may not be the right one. Continue to refine your analysis until you’re satisfied with the final number, and then do yourself the favor of adding a miscellaneous line item for 10% of your total budget. You’ll spend more than you think to get your that dream startup business going, and the “miscellaneous” category will cover any unexpected costs.
Originally published in April 2006 and updated in July 2024
