“Be prepared” is the Boy Scouts’ famous motto. If you’re launching a small business, it should be your motto too. Before you even launch your website, receive a sales call, or open your doors, you’ll have bills to pay. Understanding your expenses will help your launch be successful.
Why calculating startup costs is important
Calculating startup costs helps you:
- Estimate profits
- Develop a breakeven analysis
- Secure loans
- Attract investors
- Save money through tax deductions
Startup costs to consider
Your startup expenses will vary depending on your business type. Most businesses fall into one of three categories: brick-and-mortar businesses, online businesses, and service providers. But there are common startup costs you’ll probably have regardless of your type of business. These include:
- Office space
- Equipment and supplies
- Communications (phone, internet, email, fax)
- Utilities (electric, water)
- Licenses and permits
- Insurance (including workers’ compensation insurance)
- Legal counsel
- Financial counsel
- Inventory (product to sell)
- Employee payroll
- Advertising and marketing materials (ads, website, brochures, business cards)
- Market research
How to calculate startup expenses
Once you create your list of anticipated expenses, you can begin to estimate how much they’ll actually cost you. This process will be different for each expense you have.
Some expenses will have defined costs, like permits and licenses. You’ll have to take an educated guess what other things, like employees’ salaries and equipment, will cost. Look online to research prices and reach out to mentors, vendors, and service providers for more concrete numbers.
Once you’ve identified your expenses and how much they’ll cost, organize expenses into one-time expenses and monthly expenses. One-time expenses include buying major equipment, developing a logo, and paying for a permit. Typically, you can deduct one-time expenses for tax purposes, which may save you money on the amount of taxes you’ll owe. Track all of your expenses and talk to your accountant when it’s time to file your taxes.
Monthly expenses typically include things like utility bills, salaries, and rent. When developing your startup-cost analysis, you’ll want to count at least one year of monthly expenses, but experts recommend calculating five years of expenses to get a full projection.
Then, add up your one-time and monthly expenses to determine how much capital you’ll need—and when you’ll need it. It’s a good idea to create a formal report of your expected startup costs that’s easy to understand. This is particularly important if you plan to court investors and lenders.
Helpful tip: The U.S. Small Business Administration has a sample worksheet that you can use to develop your own startup cost report.
Thanks for reading our educational resource! Any above reference to a specific company or product is meant for educational purposes only and is not specifically endorsed by Pie. If you’re a small business owner, see more small business resources or get a workers’ compensation rate in 3 minutes.