You’ve dreamed of owning your own business, and you’re finally ready to take the leap. Here’s how to calculate startup costs and first-year expenses so you can prepare your small business for success.
Make a list of expenses
Begin by brainstorming every startup cost and ongoing operating cost you might incur. You don’t need numbers yet, just a list of every anticipated cost. Here are some common ones.
Example startup costs include:
Licenses and permits
Equipment and supplies
Technology and software
Mortgage or rent down payments/deposits
Improvements to your facility
Startup cash balance
Example ongoing operating expenses include:
Equipment repairs/new purchases
Utilities (phone, Internet, water, electricity, gas, etc.)
Insurance (business liability, property insurance, specialty insurances, etc.)
Accounting and bookkeeping fees
Payroll/employee salaries and contractors
Advertising and marketing (website, digital marketing, email marketing, social media marketing, print marketing and other advertising – don’t forget a website and hosting)
Uniforms and staff apparel
Postage and shipping
Business loan repayment
Organizational dues (Chambers of Commerce, industry associations, etc.)
Consider expenses specific to your type of business. For example, a restaurant owner will likely need to purchase kitchen equipment, tables, chairs and menus, and they’ll need to pay for special permits and inspections. A retailer will need to purchase inventory, display racks, retail packaging and potentially warehouse space. A service provider might not need to purchase or rent a storefront, but they’ll likely need equipment and will incur advertising expenses.
Imagine the day-to-day activities of employees, managers and customers so you don’t forget expenses. For example, restaurant employees have to clean, so you’ll need to account for cleaning supply costs. Customers and employees may need to use the restroom, so you’ll need to keep it stocked. Managers (or you) will need to do payroll, so you’ll need to account for payroll software.
Once you’ve created your own list, research any industry or association websites and forums to identify costs you haven’t thought of, and add them to your list.
Calculate your costs
Once your list is finished, roll up your sleeves and estimate individual costs. It’s a tedious process, but doing the work now will save headaches — and your business — later.
The best method for estimating business expenses is to research each item individually:
If you need a storefront, work with a real estate agent to identify expenses
Once you have a list of potential properties, contact utility providers to find out how much you’ll pay for utilities
Make a list of all the equipment and supplies you’ll need, then research suppliers to compare price (do the same for inventory and research multiple vendors to find the best pricing, quality and reliability)
Get quotes from multiple insurance providers
Determine how many employees or contractors you’ll need according to the number of customers you have. Set your pay wages, and factor in additional costs such as insurance and benefits, taxes, social security and workers' compensation
Create a detailed marketing plan, and determine how much money you’ll need for your digital, print and social marketing as well as other marketing channels
Ask B2B service providers such as attorneys and accountants how much they charge; compare multiple providers
If you’re taking out a business loan, compare rates from multiple banks and determine what your monthly payment will be
Estimate how much you’ll travel for business and what those costs will be (don’t forget conference and trade show fees, hotels, meals and fuel)
Factor in maintenance costs for your facility, equipment and vehicles
Don’t forget about taxes, bank fees, an emergency fund and even paying yourself
Though there are some general rules of thumb, there are no hard-and-fast rules for expenses. That said, you can use these resources to arrive at accurate cost estimates specific to your venture:
Other business owners. You can find them in online forums, business organizations and networking groups. Many will be happy to share advice, provided you’re not directly competing with them
Industry associations. Search online for associations related to your business. Many publish budgeting statistics you can use to estimate your costs
Service providers. Reach out to banks, attorneys, insurance agents, real estate agents and utility providers to get accurate costs
The SBA. The Small Business Administration offers a host of free business planning tools you can use, including a startup calculator and Small Business Development Centers that offer free business counseling for startups
SCORE. The Service Corps of Retired Executives offers free business planning workshops and free business mentors who will guide you through the startup phase, which includes calculating expenses
The IRS. Use free tools found on the IRS website to estimate taxes and payroll costs such as social security and workers' comp
Ultimately, you want your total expenses to be less than your projected revenue so you can turn a profit, which can vary by industry. Reference resources such as New York University’s Operating and Net Margins page to find average net margins by sector. For example, as of January 2019 the average net profit for restaurants was 12.11 percent. The average net profit for business and consumer services was 6.47 percent.
If you fail to plan, you plan to fail, and calculating your expenses early in the game is a vital part of business planning. Use the tips and resources here to estimate startup and first-year expenses so you can give your business the best chance of success.