How to Estimate the Cost of Starting a Business from Scratch
How much does it cost to start your own business?
Of course, the answer depends on your business model and your chosen industry. However, a useful estimate based on a 2009 study conducted by the Ewing Marion Kauffman Foundation puts the average cost of starting a new business from scratch at just over $30,000.
Many small businesses, particularly freelance, online and home-based businesses come in a lot lower than this, often needing only a few thousand to get started.
But averages aside, what can you do to calculate your specific startup costs? Read on.
Understand the Types of Costs a Startup Will Incur
Before you do any estimating it’s important to understand how startup costs are categorized. All startup costs (meaning the period before you start generating income) include two kinds of spending: expenses and assets.
Expenses – These are the costs for operations that occur during the startup phase, although they will continue throughout the life of the business.Startup expenses include deductible items such as travel, payroll, rent, office supplies, marketing materials, etc. Expenses also include initial organizational costs like legal fees, state incorporation fees, etc. You can write off up to $5,000 in business startup costs and another $5,000 in organizational expenses in the year that you start a business.
Assets– Also known as capital expenses or expenditures, these are the one-time costs of buying assets such as inventory, property, vehicles, or equipment as well as making upfront payments for security deposits. These startup assets don’t usually qualify for deduction, however, some can be written off through depreciation at tax time.
You can read more about the difference between these two and why it’s important to keep good expense records in SBA’s Small Business Expenses and Tax Deduction Guide.
Define What You Need to Spend Money On
To estimate your startup costs, start by creating two lists – one for your startup expenses and one for your assets. Your list should be informed by the aspects of your business that will have costs associated during the startup phase, such as facility improvements or the equipment and inventory you need. But don’t forget to consider items such as brochures, business cards, and website development costs or any security deposits you need to make. Do you need the help of a consultant, tax advisor or lawyer to help you get started?
Next, categorize these items as essential or optional – do you really need to spend money on these before you start making any kind of income?
Now we come to crunch time – assigning costs to your startup “to do” list. This process is always going to be a best guess, but be realistic and use past experience, research, and advice from other entrepreneurs to guide your cost estimates. Organizations such as your local MBDA Business Center, SCORE and your local Small Business Development Center can provide valuable advice about how to calculate your startup costs.
Whatever you do, don’t underestimate your costs, or try to force your costs to fit the amount of money you have available. If the costs are too high, consider another approach to starting a business.
Could you run a home-based business?
Instead of buying inventory upfront could you have manufacturers drop ship?
Could you subcontract rather than hire employees?
What about buying surplus office equipment and furniture from the government at or below cost?
It’s All in the Timing
Remember, as mentioned above, startup costs are accrued before you have income to supplement your business. So develop your budget with this in mind. For example, startup expenses such as rent and payroll are only that until your business is operational, once you reach that point they become running expenses that you take out of your profits as deductible against your taxable income. So you may want to delay some of your depreciable costs until your business is up and running.
Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed.