How to Estimate the Cost of Starting a Business from Scratch

How much does it cost to start your own business?

Of course, the answer depends on your business model and your chosen industry. However, a useful estimate based on a 2009 study conducted by the Ewing Marion Kauffman Foundation  puts the average cost of starting a new business from scratch at just over $30,000.

Many small businesses, particularly freelance, online and home-based businesses come in a lot lower than this, often needing only a few thousand to get started.

But averages aside, what can you do to calculate your specific start up costs? Read on.

Understand the Types of Costs a Start up Will Incur

Before you do any estimating it’s important to understand how start up costs are categorized. All start up costs (meaning the period before you start generating income) include two kinds of spending: expenses and assets.

  1. Expenses – These are the costs for operations that occur during the start up phase, although they will continue throughout the life of the business. Start up expenses include deductible items such as travel, payroll, rent, office supplies, marketing materials, etc. Expenses also include initial organizational costs like legal fees, state incorporation fees, etc. You can write off up to $5,000 in business start up costs and another $5,000 in organizational expenses in the year that you start a business.
  2. Assets – Also known as capital expenses or expenditures, these are the one-time costs of buying assets such as inventory, property, vehicles, or equipment as well as making upfront payments for security deposits. These start up assets don’t usually qualify for deduction, however, some can be written off through depreciation at tax time.

You can read more about the difference between these two and why it’s important to keep good expense records in SBA’s Small Business Expenses and Tax Deduction Guide.

Define What You Need to Spend Money On

To estimate your start up costs, start by creating two lists – one for your start up expenses and one for your assets. Your list should be informed by the aspects of your business that will have costs associated during the start up phase, such as facility improvements or the equipment and inventory you need. But don’t forget to consider items such as brochures, business cards, and website development costs or any security deposits you need to make.  Do you need the help of a consultant, tax advisor or lawyer to help you get started?

Next, categorize these items as essential or optional – do you really need to spend money on these before you start making any kind of income?

Assign Costs

Now we come to crunch time – assigning costs to your start up “to do” list. This process is always going to be a best guess, but be realistic and use past experience, research, and advice from other entrepreneurs to guide your cost estimates. Organizations such as SCORE and your local Small Business Development Center can provide no cost and valuable advice about how to calculate your start up costs.

If you use a smartphone, another option that you might find useful is the SBA Mobile App which includes a handy tool for calculating start up costs.

Whatever you do, don’t underestimate your costs, or try to force your costs to fit the amount of money you have available. If the costs are too high, consider another approach to starting a business.

It’s All in the Timing

Remember, as mentioned above, start up costs are accrued before you have income to supplement your business. So develop your budget with this in mind. For example, start up expenses such as rent and payroll are only that until your business is operational, once you reach that point they become running expenses that you take out of your profits as deductible against your taxable income. So you may want to delay some of your depreciable costs until your business is up and running.

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