For many would-be entrepreneurs, starting a business is their biggest dream. Making that dream a reality requires hard work, motivation, and capital, and being smart about calculating exactly how much your new business start-up costs will be is a key first step toward reaching the goal of getting your small business off the ground. Underestimating those start-up costs can be fatal for a fledgling business. If you anticipate that it'll take a while for your business to gain traction, then you'll want to make sure you have the money you need to spend on one-time costs and recurring expenses until your business starts bringing in revenue on its own.
Up-front costs of starting a business
There are a number of one-time fixed costs that you'll incur when you start a business. If you don't already have the equipment you'll need to run your business, then that often ends up being a big-ticket item, especially if you decide to purchase it outright. If your business involves selling products, then you'll need to build up your inventory, which can often cost a substantial sum as well.
In addition, most businesses have to deal with costs related to forming a business entity. Legal, accounting, and other professional fees can add up, and fees to get permits or licenses can also be expensive. Deposits on leased space or equipment as well as utility services also can take a chunk of cash out of your pocket, and if you need to build up a presence in the business community, you'll want to dedicate some money toward marketing and promotional activities, whether through traditional advertising or by setting up a website and related internet-based marketing.
Costs you'll need to pay regularly
In addition to those one-time costs, there are ongoing expenses you'll have to pay each month. The biggest is typically salary for yourself and for employees, and although you have some flexibility with how you take your own compensation, making payroll is a necessity if you have unrelated employees working for you.
Other monthly expenses include rent, monthly lease payments on equipment, insurance, taxes, and interest on any money that you borrow. Supplies, postage, phone and internet charges, and other utilities also have to get paid each month. If you regularly use legal or business consultants, then their fees often have to get added to the total.
How much money you'll need to start your business
The easiest way to figure how much money you'll need to start your business is to use a calculator. The one below has everything you need to come up with an initial estimate.
Editor's note: The following language is provided by CalcXML, which built the calculator below.
To see how this works, let's start with a basic example. Say that you're a sole proprietor with no other employees and you expect that you'll need three months to get your business producing revenue. You want to take a salary of $2,000 per month, you've leased space for $500 per month, and you anticipate that utilities, supplies, phone, utilities, and business insurance will add another $1,000 per month to the total. You've set a budget of $5,000 for office furniture and equipment, and you've lined up assistance from legal professionals for $1,000.
When you enter those numbers into the calculator, you'll find that you'll need a total of $16,500 to start your business. That consists of up-front costs that total $6,000 and recurring costs of $3,500 per month for a total of three months. Ideally, you'd be able to save up a bit more than that amount before you got started, so that if your initial estimate of how long it will take to get your business off the ground proves to be overly optimistic, you have a margin of safety to keep your business running.
Be sure you have the money you need to start your business
Business owners can get capital from their own pocket, from borrowing, or by raising capital from investors. Yet whatever way you managed to bring in that money, you'll want to make sure you have enough to get the job done. By being aware of your start-up costs and planning accordingly, you'll be in the best possible position to get your business off to a good start.
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