How to Estimate the Cost of Starting a Business from Scratch
By Caron Beesley Published: November 21, 2011
How much is it going to cost you to start the business you’ve dreamed of?
In 2009, the Kauffmann Foundation estimated that the average start-up cost was approximately $30,000. The truth is that no business is the same and many micro-businesses can get started for as little as $3,000 or less. These businesses are often home-based sole proprietorships with low upfront investments. Another low-cost option is a franchise. While your average Main Street franchise may require a larger investment, home-based franchises can be started with as little as $1,000-$5,000.
Speculation aside, it’s important to understand the costs specific to your venture, regardless of its size. Getting the number right will help you determine what financing you may need to get off the ground, what it will take to reach your breakeven point (when you can expect to start making a profit), and manage cash flow once you’re up and running.
Here are some simple tips for calculating your start-up costs:
Understand your costs
Start-up costs are technically defined as the costs you’ll incur before you start making any income. It’s an important distinction to make because it will impact your tax return. These costs are broken down as follows:
1. Expenses – These are the costs involved in preparing to open a business and may include things like market research, the mileage costs involved in researching a location, advertising, training, wages, and any fees paid to professionals or consultants such as a lawyer or accountant.
Many (but not all) of these costs are tax deductible, up to $5,000 in the first year of doing business. The remaining costs are then amortized (meaning you deduct them in equal installments) over a period of 180 months (starting with the month in which your business opens).
If you decide not to open a business after doing all your research, the deduction benefit goes away. Instead, these expenses are considered personal costs and aren’t deductible. Read more about the ins and outs of start-up deductions in How to Write Off the Expense of Starting Your Business.
2. Capital Expenditures – You’ll also
incur one-time costs to purchase assets such as inventory, property, vehicles,etc. These don’t typically qualify for a deduction, but can be written off through depreciation.
Assess your assets
Next, what have you got in the bank? You’ll need this money to support your business in its start-up phase and pay-off necessary business and personal expenses such as payroll, rent, utilities, etc. until the business is self-sustaining.
Using a spreadsheet, create a list of the start-up expenses and capital expenditures that you expect to incur, alongside the assets that you have. Try to assign costs to each expense, even if it’s a best guess.
Make the calculation
Once you’ve got a reasonable estimate in place, use this handy Starting Costs Estimator Calculator. Developed by PaloAlto Software and offered by Entrepreneur.com, it’s free to use and takes the pain out of doing the math. It also includes a sliding scale that lets you estimate your cash reserve needs based on your estimated monthly spending and money in the bank.
If the costs are looking too high, revisit your expenses and look for ways to cut them. If you need meeting space but can’t afford a commercial lease, consider co-working spaces or serviced office space. Cut the cost of office productivity tools by using cloud-based services instead of costly software licenses. Talk to other business owners and get a realistic appraisal of what the true and manageable costs might be.
As I mentioned above, every business is unique and budgeting for your new business should be looked at in the context of your wider business plan. It’s not something you have to do alone, either. Small business resources like your local Small Business Development Center. Women’s Business Center. Veteran’s Business Center or the mentoring experts at SCORE can all help.
Here are a few more resources to bookmark:
- SBA Learning Center’s Starting a Business Online Courses
- Build Your Business Plan Tool – This free interactive online tool provides you with a step-by-step guide to help you get started.
- SBA’s Thinking About Starting a Business Guide