If you want to give your startup a fair chance at success, then you have to adequately prepare for it. Even before business starts, there are some costs you will have to incur. Having a good understanding of such expenses will help you launch your business well.
Reasons why calculating startup costs is important
It helps to;
Estimate profitsConduct a break-even analysisSecure loansAttract investorsSave money with tax deductions
1.Identify your startup costs
No matter what niche your business belongs to, the following expenses are most likely to be incurred;
Office spaceEquipment and suppliesCommunicationsUtilitiesLicenses and permitsInsuranceAttorney and accountant servicesInventorySalariesAdvertising and marketing (including printing marketing materials)Market researchCreating a company website and social media presence
2. Estimate your expenses
Once you have identified your expense areas, it is important to estimate the cost of each of them.
Some expenses have well-defined costs like permits, licenses and insurances tend to have clear, published costs. Some others may be less certain like employee salaries and utilities. You may speak with vendors and service providers to find out how much similar companies pay for expenses to be able to draw realistic cost estimates.
3.Organise your expenses for a whole financial outlook
After identifying your business expense areas and costs, you need to organise them into one-time expenses and recurring (monthly) expenses.
One-time expenses are the initial costs occurred at the startup stage like buying major equipment, hiring a logo and website designer, and paying for permits and licenses. Make sure to keep track of your expenses and consult your accountant when it’s time to file your taxes.
Recurring expenses typically include salaries, rent, and utility bills. You may calculate at least one year of monthly expenses, but calculating for five years is considered ideal.
Add up your one-time and monthly expenses to get a good picture of how much capital is needed and when you would need it.
4.Use your startup expense projections to seek startup funding
It is important to draft a formal report of your expected startup costs. Create it in a format that is clear and easy to understand so potential investors and lenders can analyse the profit potential of your business by comparing the expected expenses to projected revenue.