What are Start-up Costs?
Start-up costs are the expenses incurred when starting a new business. These costs are associated with the start-up period of the business and include expenses that are incurred both before and after the business has opened its doors.
Start-up costs represent one of the largest hurdles that new business owners must clear to get their business off the ground.
Failure to accurately account for start-up costs can mean running out of funds or having to scale back growth. In extreme cases, a failure to understand and account for start-up costs can result in the business failing before it even gets off the ground.
Common Start-up Costs
The exact costs associated with a new business vary wildly based on nature of the business. The equipment, location, and staffing needs of a new fitness center are different from those of a new HVAC repair and installation business, for example.
Differences between businesses in varying industries aside, there are some general areas of the new business planning process where all entrepreneurs can expect to incur cost.
New businesses need a reserve of capital to open the doors and sustain the company until it is able to produce revenue on its own.
This money isn’t free. Investors will expect a return on their investment and banks will charge interest on funds obtained through a loan.
In addition to the cost that interest incurs, there is another less obvious start-up cost associated with raising funds. Servicing debt, or making payments to repay a loan, eats into a company’s available cash flow.
A business that is starved for cash on hand will struggle to meet its obligations, meaning that the costs associated with borrowing are some of the most important start-up costs for entrepreneurs to get right.
Insurance and Fees
Permits and fees vary based on the locale and the type of business you are starting. In most cases, these fees are manageable. Failing to comply with federal, state, or local permits or fees can incur further costs, so it is important to comply and keep the costs to a minimum.
Insurance, on the other hand, can be a little trickier.
Understanding how much insurance your business should carry and what exactly should be insured is not as straightforward as paying a fee. Investors or lenders will stipulate that the business carry some form of insurance to protect their investment.
Generally speaking, most businesses should have some form of general liability insurance. Workers’ compensation insurance is a good idea if your business will have employees.
If it has expensive equipment, it might be a good idea to insure that as well. Don’t forget commercial auto insurance if your company has a vehicle that is used for work purposes.
Today’s startups cannot exist without the benefit of technology, so a summary of start-up costs should include an allowance for tech expenses.
These include communications services such as phone and internet, web design and hosting services, and accounting and payroll software, if applicable. Your summary of start-up costs may not include all of these items—many businesses elect to outsource services such as accounting.
Equipment and Supplies
Every business requires some form of equipment and supplies. From a personal computer with an internet connection all the way to complex manufacturing machines, equipment costs are unavoidable. Do your due diligence and weigh the pros and cons of leasing or buying outright.
Advertising and Promotion
Advertising and promotion costs are not exclusive to the start-up period. For many businesses, especially those that rely on foot traffic or a high volume of transactions, ongoing effective promotion can be the determining factor that makes or breaks success. Whether your new business handles advertising and promotion in-house or farms it out to an agency, this cost needs to be accounted for.
Employee expenses are more than just your payroll. Health insurance, payroll taxes, sick days, and other benefits add up to more than the basic wage calculation. Many entrepreneurs are passionate, driven individuals but they are not superhuman. It is the rare business that can grow on the shoulders of a single entrepreneur.
In addition to the start-up costs associated with your employees, it is crucial that you familiarize yourself with labor laws in your locale.
This includes federal labor laws, state-level laws, and any local laws or ordinances that might impact your business. Not only is failure to adhere to labor laws a PR disaster, it can incur sky-high fines and permanently destroy your relationship with your employees.