From payroll to customer acquisition, office space, and tech stack — you need to manage a whole lot of expenses as a startup founder. Foreseeing costs and planning accordingly often make the whole difference in determining whether your startup will be a success. So in this post, we look at startup costs and how you can plan for a sound financial plan in 2022.
Once you read it, you’ll learn:
- What are startup costs
- Which startup costs you should be aware of
- Why being realistic about your startup expenses matters
- Costs to bear in mind after the launch
What are startup costs?
Startup costs are the expenses and bills you incur as you build your business from an idea to a fully-fledged brand. They include every penny you need to spend to make your business a success, from the initial administrative fee to holiday bonuses for your global team. Normally, startup costs mean costs and bills you pay from establishing your business until launching your services or product. Think of them as pre-work expenses.
Why is it important to calculate startup costs?
Facing the hard reality of building your startup from the ground can be off-putting.
Still, if there’s one thing that matters when building a business, is to know the income and expenses at all times. This lets you plan, pivot when needed, and also helps you focus on the most important bits first. If there’s a chance you might need to trade off your employees’ wages and a new marketing campaign, it’s better to know it well ahead and act accordingly.
Attract investors and lenders
But there are other benefits here. The better you understand your startup costs, the easier it will be for banks and potential investors/stakeholders to trust you. A clear overview of startup costs shows that you are diligent — which is a good signal for attracting investors.
Build a reliable financial plan
Knowing your costs will help you create a reliable financial plan. This means that you will be able to make realistic estimates of your growth. And each time you adjust and update your costs, you will be able to consistently update your estimates and the financial plan. This gives you the edge, as you will secure time to make sensible business moves, without reacting out of necessity.
What are typical startup costs?
While each startup is unique, the costs vary only to some extent. And it’s important to keep in mind that each stage of your business will bear different costs. Many startups focus solely on the flurry of initial customers, but this can prove fatal to business longevity. Instead, be meticulous with planning for business expenses at each stage.
Costs before opening your business
Your pre-launch costs will vary depending on your industry, business model, and target market. Still, you can plan for most of the costs at this stage, as they’re somewhat standardized.
As a rule of thumb, you can split these costs into two categories: one-off costs and recurring costs.
At this stage, you will typically need to cover the following expenses:
- Initial research of costs and market (you may choose to hire an established research firm to conduct market research)
- Expenses to procure technology for the initial team (including hardware, software, licenses)
- Administrative costs and fees (incorporating your business, paying for a business representative services, where applicable)
- Permits, licenses to operate, and related fees
- Initial equipment and supplies — this depends on the industry/product/service that you provide, but can include anything from office chairs to desks and to
- Borrowing costs — unless you already have enough initial funds, you will probably need to take a small business loan; remember, while you may not need to pay it off straight away, always include and be aware that this is still an expense you need to cover.
- Brand design, which includes anything from a logo to website launching, printing and ordering business cards.
These are the expenses that you will need to continue paying at regular rates, both before and after the launch of your product, but just on a different scale. These costs will increase as your team and product grow. They include:
- Legal services
- Employee wages for the founders/ founding team
- Insurance payments
- Loan repayment
- Utilities/office space
Costs after you launch
Employee wages, contributions, and benefits make a significant part of your startup spending. Be sure to include and plan for all employee expenses, including your own wages.
As you go about growing your customer base, you’ll need to invest in marketing efforts. Now, this amount depends on whether you rely mostly on paid ads, where costs can shoot through the roof in some industries, or look for more organic means of promotion. Still, even if you want to use just social media, you may want to include costs such as paying influencers to advertise or offering a loyalty program; it’s important to approach this strategically and plan ahead for potential costs.
Assets typically stand on the opposite end of your balance sheet and many startup founders, especially first-time business owners, tend to forget about them. But as you and your team use company property it starts deteriorating, and you need to ensure you have enough funds to cover their maintenance and repair. This includes anything from company laptops and other devices, to vehicles, office equipment and furniture, and the starting inventory.
No matter how well you plan ahead, there’s always some chance that things won’t go exactly as planned. This could be anything from hardware or software failures, or any force majeure event, such as floods or earthquakes or the Covid-19 pandemic.
So, this is the list of main startup costs you’ll encounter as you build your business. They can vary greatly, but if you include them in your initial projections, you will already be covering the largest share of your startup expenses. And so you do this, you will be able to plan better and have a lasting, profitable business.
Need help building a blueprint of your startup costs? Try Idea Buddy’s financial plan for free today and don’t let any hidden cost surprise you as you build a lasting venture.