Estimating the cost of starting a business in the US

How much does it cost to start a business from scratch?

This is a question many people ask when they want to start a business. There is no specific answer; the answer depends on your business model and your chosen industry. A recent study by Mount Bonnell Advisors, however, found $30,000 to be a useful estimate for starting a new business from the ground up.

Many small businesses, particularly freelance, online and home-based businesses, cost a lot lower than the estimated $30,000. Often, smaller businesses only need a few thousand to get started.

Let us put averages aside and deal with a few facts. What can you do to calculate the specific startup costs of a business from scratch?  In this estimation process, you will need to comprehend the types of costs a startup will incur. Even more, you need to understand how startup costs are categorized.

Types of costs for a startup

There are two types of costs to consider before even factoring in potential income generated from a startup business: startup expenses and startup assets.

• Startup Expenses

Startup expenses include the costs for operations that occur during the startup phase. Although they will continue throughout the life of the business, some are one-off payments. For instance, legal fees, state incorporation fees, promotional and advertising activities and employee training are all considered startup expenses.

Equipment acquisition, miscellaneous fees, travel, payroll, rent, office supplies, and marketing materials are also considered startup expenses. In other words, startup expenses are a variety of different costs that an entrepreneur incurs to establish the business.

• Startup Assets

The startup assets are called capital expenses or expenditures. These are the one-time costs that entrepreneurs incur when buying assets. Assets for a startup may include inventory, property, vehicles, equipment and upfront payments for security deposits. Usually, these startup assets do not qualify for a deduction. However, one may write off some assets through depreciation during tax season.

Additional costs such as interest, taxes, research and experimental fees do not qualify for tax deduction. Most notably, these types of costs are not necessarily organizational expenses. These are costs incurred in investing the acquisition or in the creation and setting up of an active business.

Essentially, startup costs are the expenditures that an entrepreneur incurs after deciding to establish a business. A taxpayer who delves into owning a small business may choose to amortize these expenses for a minimum of five years.

Exactly how do you estimate startup costs?

It is important for an entrepreneur to understand how to approximate the startup’s costs while thinking about starting a business, not after. Here are some tips on how one should effectively estimate startup funds.

Define the costs incurred

To estimate startup costs, start by creating two lists. One list should contain your startup expenses and the other one the assets. Your lists should have information as per the aspects of business that will have costs associated during the startup phase. This may include facility improvements or the equipment and inventory you need.

Do not forget to consider items such as brochures, business cards and website development costs. If you need the help of a consultant, tax advisor or lawyer to get started, contact us.

Next, classify these items as essential or optional. Ask yourself whether you really need to spend money on these before you start making any kind of income.

Assign costs

Crunch time! Assigning costs should be one of the most important aspects of your startup’s ‘to-do’ list. Even though this process requires approximations, it is prudent to be realistic when estimating. It would be best to use past experience, research and advice from other entrepreneurs to guide your cost estimates. Organizations such as your local can provide valuable advice about how to calculate your startup costs.

It is wise to avoid underestimating potential costs. Try to overestimate expenses, so you never fall short regardless of the funds you have available.  If the costs are too high, consider other viable approaches to obtain proper funds. You could exploit options like business loans and selling assets that are not in use among other options, including::

• Run a home-based business

• Have manufacturers or suppliers give you credit instead of buying inventory upfront

• Subcontract workers rather than hiring full-time employees

Develop a budget

As mentioned above, startup costs are accumulated before you have the income to supplement your business; therefore, its imperative that you develop the cost estimates with a budget in mind. Having a rough estimate of costs can keep rent and payroll expenses from creeping up on you during the planning phase.. Make a budget of how much you plan to incur and make a forecast for at least three months in advance.

If this all seems a bit overwhelming, we will be glad to help you in estimate your specific startup costs. Get in touch with us!