The myth: most startups lose money for the first two years.
The reality: they don’t have to.
Failure is good, it’s a learning experience. We’re meant to embrace it, learn from it, and pivot accordingly. That said, why would you set yourself up for failure? Don’t dive into a startup expecting to lose money, expect to make money. Set forth with a clear strategy to be profitable and if it doesn’t work, you don’t brush it off as though it was part of the plan.
Okay, so if you’re not meant to plan on losing money, how do you calculate startup costs?
The most ideal approach to accurately calculate your business’ startup expenses is by drafting a field-tested strategy. One of the principal segments is the monetary projections and estimations. In that area, you gauge income, benefit, and costs for the following three to five years.
Of course, evaluating start up costs is difficult when there’s nothing to measure it against. How do you estimate startup costs without records or current cash flow. Without these things many struggle to create accurate projections (which can be expensive in the long run). Fortunately, there are many templates, programs, and consulting firms that help business owners create accurate budgets to secure financial fidelity.
The Golden Rule when Estimating Startup Costs
When estimating and analyzing business startup costs, a standard guideline successful proprietors use is to have the option to cover a half year of costs in advance. This way you don’t depend on your business’ income to begin facilitating your expenses until the cash flow of the business becomes consistent and diversifies. You’ll need a pad while you get some kind of foothold and work on building your business’ foundation.
Many of these startup expenses are likely going to repeat annually, so you’ll have to continue paying them; either on a month to month, quarterly, or yearly premise— always think about lease expenses, employee financing, office supplies, and expanding expenses. When creating your startup expenses, incorporate into the budget luxuries such as furniture, office break room supplies, and business amenities, which are usually a business expense paid once.
Budgeting and Business Plan Tools
The great thing about starting a business in today’s market are the online tools available to assist with business document creation. These tools are sometimes costly but there are a few free and reasonably priced platforms available. There are also spreadsheet templates that have proven useful to new business owners are, for example, the Gusto’s startup spending spreadsheet and SBA’s start-up costs worksheet. Utilize these formats to appraise the aggregate sum of assets you’ll have to satisfy your underlying costs. That way, you’ll have a superior comprehension of how much capital you’ll have to raise when you look for startup financing.
Average Business Startup Expense Estimations
Now I know what you’re thinking:
So don’t anticipate losing money for 2 years, but factor in fronting 6 months ahead of time… what else do I need to know?
Here’s a quick list of average startup expenses.
- Asset Protection and Insurance: Depending on the amount of coverage most businesses spend about $1,200 every year on asset and property protection.
- Assessments and Taxes: Taxes charged to a business are dependent on the city and state the business resides (such as the B&O tax), the average assessment rate in the United States is 21% corporate expense rate.
- Sole Proprietor Travel Expenses: Travel expenses for the proprietors of the company may vary dependent on many variables.
- Transportation of Products and/or Goods: Shipping and transportation costs of business products and goods depend on many factors. The most costly shipping expenses are generally dependent on the involved third party product handling company.
- Office furniture and supplies: 10% of spending plan.
- Utilities: Utility charges average about $2 per square foot of usable office space.
- Employee Financing: 25-50% of business income and revenue. Payroll usually consists of expenses up to 50% of total business costs.
- Hardware and equipment: $10,000 to $125,000 (it fluctuates greatly, I know, but considering some people work in engineering or tech compared with real estate, it’s not easy to provide an average across all industries).
- Office Leasing: $100-$1,000 per representative every month.
To get a better idea of what you expenses to expect and create a financial roadmap you can be confident in, reach out to our advisors today.