Business Startup Costs You Can't Afford To Overlook
Business Startup Costs You Can't Afford To Overlook
Courtesy: Eren Pamir | News Source: forbes.com
Obtaining startup funding is an exciting step toward building the business of your dreams. However, according to The Wall Street Journal, an estimated three out of four venture-capital-backed startups fail. I believe this illustrates the need to take the funding available to you so that you don’t unexpectedly run out of money after only a couple of months.
As the vice president of a company that helps fund small businesses, I’ve seen that it is critical to slow down and plan out your full budget — early in the process. A startup budget template can help ensure you don’t overlook anything. In this two-part series, I’ll share with you some important costs to keep in mind during the planning phase. Some of your costs will be one-offs, like buying equipment, but others will recur monthly or annually. The Small Business Administration (SBA) recommends securing enough funding for at least the next 12 months.
As you’re crafting this template, remember to take the following items into account:
General liability insurance is critical. In my experience, when you’re starting off, a single accident or unsatisfied customer could put you out of business if you don’t have insurance. Depending on your business’s needs, you might need additional coverage, such as:
• Product insurance in case items are defective or cause damage
• Errors and omissions insurance to cover you for professional mistakes
• Workers’ compensation insurance in case an employee is injured at work
• Commercial property insurance to protect your premises and equipment
• Commercial auto insurance if you have a company vehicle
To insure your business, find a reputable commercial licensed agent, and consider shopping around to find a price that fits your budget. The average small business (with 10 or fewer employees) pays around $1,281 annually in insurance premiums, according to an internal analysis by Insureon. That number can rise depending on the types of insurance you buy, your coverage, your industry and the size of your company.
2. Business Licenses And Permits
Depending on your business type and location, you will also need municipal, state or federal business licenses. Federal licenses cover activities such as selling alcohol, broadcasting on TV and radio, and transportation and logistics. State and municipal licenses are needed for broader business activities, including electrical contracting, teaching yoga or running a daycare center.
Your business license often has to be renewed every year or every few years. If you choose to incorporate your business entity, you can typically expect to pay up to $300 per year.
Other items you might need to consider are permits to import goods/raw materials, a sales license or fees to join professional organizations.
With respect to getting the right licenses, consult a lawyer. You can also check online to help find which permits and licenses you need.
3. Marketing Costs
I believe it’s best to keep your marketing budget low. For a startup, the SBA recommends budgeting 7% to 8% of total revenue for marketing, though new startups will want to go higher. At the early stages of your business, it makes sense to spend a higher percentage because you are looking to build a brand name, awareness in the market and leads.
Margins are extremely important when running a new company, and cash will be tight. That’s why you need to watch your marketing costs closely and manage your return on marketing investment carefully.
Some important items to budget for include:
• A website, including one-time costs, such as web design, and recurring costs for web hosting and payment processor fees (if you have an online store)
• Email marketing services
• Digital marketing costs
I believe the best tactical advantage here is to get as much as you can for free. For example, make sure to set up your business listing online. This will help drive local calls for free every month. By saving money in this area, you’ll have a little extra in your budget for running local ads to help drive traffic.
4. Business Space
Rent or purchase costs can eat up a large chunk of your startup budget. Office rental costs vary depending on your location and business type.
It can be tricky to find the right balance when you acquire office space, especially if you need to customize your business premises. Co-working spaces can give you the flexibility to expand.
I recommend starting with a co-working space for the first five to 10 employees as it gives you month-to-month lease flexibility. Once you expand beyond that, you will start getting a better idea of your office needs and can commit to longer-term lease. If possible, locate your office outside major metropolitan areas to save.
A good rule of thumb is you want to spend 2% to 4% of your revenues on office space.
5. Equipment, Office Furniture And Office Supplies
Make a detailed list of all the miscellaneous items you’ll need to move your business forward so you aren’t caught off-guard. For example:
• Specialist items, such as professional ovens or 3D printers
• Company vehicles
• Recurring office supplies, including paper and printer ink
• Business computers, printers and scanners
• Subscriptions to office management software programs
The SBA provides a nice worksheet for calculating these costs.
Factor in electricity, gas, water, internet, phone, cooling and heating bills to budget for your utility costs. Again, the SBA can help you estimate how much these can cost. But use these prices as a starting point, as your real costs could differ.
In my experience, many people do not plan for all the expenses that come with running a business — and there are even more I will cover in part two. The key takeaway is when business funding is on the table, accept as much as you can (as long as the prices and terms are fair). There are often many surprise expenses business owners must face, but if you plan well, your business has a better chance to survive.