How Much Does the Average Startup Need To Open Its Doors for Business?
When it comes to the cost of opening a business, there is no such thing as an “average startup.” Costs to start a company vary wildly based on the type of business, where it operates, whether it has a physical or online presence and what industry regulations apply. However, there are some standard costs that apply to most businesses, and these are the ones that you should start with in your business plan.
As a guideline, the U.S. Small Business Administration estimates that the average small startup business will face origination costs of around $3,000. On top of that amount, you’ll need to research the extra costs that may apply to your specific type of business. Here are the typical costs involved in getting a startup company off the ground.
What Are the Most Common Startup Expenses?
If you’re setting up a physical storefront, you’ll have more startup expenses than a strictly online business. However, you’ll still have many of the same startup expenses as other companies. According to the U.S. Small Business Administration, these are some of the most common expenses that new companies should expect:
- Licenses and permits
- Office space
- Supplies and equipment
- Advertising and marketing
This is just a beginning list of items that typically apply to most businesses, but specifics will always vary. Before you get too deep into the planning of your startup business, check with local authorities to determine what your specific company will need to get up and running.
Here’s a quick look at how much some of these startup expenses may cost you.
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Licenses and Permits
Although business regulations vary greatly by location and industry, the good news is that permits and licenses have clear, published costs that you can verify with the appropriate authorities. In Nevada, for example, a corporate business license is $500, but that falls to $200 for all other types of businesses. In California, an annual tax of $800 applies to all LLCs. Generally, a basic business license costs anywhere from $25 to a several hundred dollars.
Startup business insurance can run from a few hundred to a few thousand dollars. According to The Hartford, small businesses pay $1,057 per year on average for general liability insurance, or $3,135 for a combined business property and general liability policy.
New companies should generally start out slow in terms of inventory until they assess the real-world demand for their products. Most companies use about 25% to 35% of their operational budgets for inventory, according to Forbes Advisor. One good rule of thumb is to keep about 10% of your annual expected sales in stock at any one time. This means that if you estimate annual sales of $100,000, you should keep about $10,000 in product on hand.
The cost of office space averages about $300 per employee, although that can jump over $1,000 per worker in high-rent areas like New York and San Francisco.
Technology, Supplies and Equipment
Technology, equipment and supplies are a wild card when it comes to businesses. Some businesses might only require a few thousand dollars of computers, while others might need tens of thousands of dollars of specialized machines and super-fast, next-gen networks. Generally speaking, however, you can expect to spend somewhere between $1,000 and $10,000 on technology, supplies and equipment for most startups.
If you just start out with a handful of employees and pay them $15 per hour, you’re looking at about $75,000 to $100,000 per year in employee salaries. Obviously, you’ll have to pay more if you have specialized workers, such as dedicated IT or HR department heads, but most startups don’t have high initial worker costs. If you’re self-employed, for example, you might not have this expense at all.
Advertising and Marketing
The SBA recommends that businesses with less than $5 million in revenue spend 7%-8% of their revenues on sales and marketing.
Why Is Calculating Business Costs So Important?
Estimating your business costs before you launch your startup is important because you need to know how much money you’ll need to fund your operations. Whether you contribute the money yourself or raise it from friends, family or outside investors, your business will almost certainly fail if you launch before you have the necessary funds.
According to the SBA, you also need to calculate your business costs so you can estimate profits, conduct a break-even analysis and save money with tax deductions.
The Bottom Line
In a well-written business plan, you’ll take all of your startup costs and offset them with projected future income to determine if your business is viable. This is a critical step that all businesses need to take before they launch. While you can use general or average costs as a guide, you’ll have to do the legwork and investigate real-world examples of what your specific startup expenses will be before you can open your doors for business.
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