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How to Calculate Start-Up Costs for a Business

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  • Start-up costs are the expenses required for getting a business up and running. The amount of money you will need to start a business will vary depending on the type of business you are starting. Learn how to calculate start-up costs for a business by following these simple step-by-step instructions.

  • Disclaimer

    The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

  • Introduction

    • Start-up costs are the expenses required to start a business plus the expenses required to keep operating the business until the business can sustain itself. The average start-up budget is $10,000.Small Business Television Network: How To Calculate Start-up Costs: It's Part Science and Part Intuition Your budget will depend on the type of business you are starting. Calculating your start-up costs is an important step towards determining how much capital you will need.

  • Step 1: Write a Business Plan

    • If you haven't already, you need to decide on a business model and commit it to writing. Your business plan should include:
    1. An executive summary.
    2. A business description.
    3. Financial data, including:
      1. Personal tax returns
      2. Credit reports
      3. Income projections
    4. A market analysis.
    5. A description of the business' services or products.
    6. An operations and marketing plan.Small Business Administration: Essential Elements of a Good Business Plan for Growing Companies

  • Step 2: Research Similar Business Models

    • Looking at comparable businesses in your industry can help you predict how much money you will need.
    1. Break down how much a comparable company spends into a percentage of revenue.About.com: Calculating Startup Costs
      • Use these percentages as goals.
    2. Contact local trade associations and ask for advice.
    3. Contact your local Small Business Administration or SCORE small business counseling chapter.Small Business Television Network: How To Calculate Start-up Costs: It's Part Science and Part Intuition
    4. Talk to local entrepreneurs and learn from their experience.

  • Step 3: Estimate Your Anticipated Costs

    • Now that you have researched other companies, you should have a better idea of what your budget will look like. Each type of business is different and will allocate money to different areas. Before you can calculate your costs, you will need to prioritize your expenses and estimate one-time and ongoing costs.

  • Prioritize Funding

    • Every business can break down their costs into the same categories, but depending on the type of business you will be running, you will have different requirements for allocating your money. Consider these areas:About.com: Calculating Startup Costs
    1. Cost of sales, including:
      1. Inventory
      2. Materials
      3. Shipping
    2. Professional fees, including:
      1. Legal services
      2. Financial services
      3. Trademark and patent fees
    3. Technology, including:
      1. Computer hardware, software and accessories
      2. Security, IT consultants and Web developers
    4. Administrative, including:
      1. Insurance
      2. Licenses
      3. Permits
    5. Sales and marketing, including:
      1. Public relations
      2. Advertising
    6. Wages and benefits, including salaries and other employee costsStartUpNation.com: Estimating Startup Costs for a New Business
    • Take the time to list every anticipated expense and sort into the proper category. This will help you estimate where your funding is needed.

  • Prepare a Budget

    • Once you have figured out what expenses you will incur, you can separate your one-time costs from your ongoing costs to create a start-up budget and a working budget.
    1. Divide your expenses into one-time costs and ongoing costs.
      1. One-time costs are upfront expenses that may include licenses, permits, equipment and furniture.
      2. Ongoing costs are recurring expenses like rent, salaries, inventory and insurance.About.com: Calculating Startup Costs
    2. Decide what is essential to starting your business, delaying expenses you don't need.
    3. Divide your ongoing expenses into fixed expenses and variable expenses.Small Business Administration: StartUp Costs
      1. Fixed expenses are usually paid on a regular basis and do not change from period to period.About.com: Fixed Expense Examples include:
        1. Rent
        2. Insurance
        3. Salaries
      2. Variable expenses change from period to period and depend on your sales.About.com: Variable Expense Examples include:
        1. Inventory
        2. Office supplies
        3. Shipping costs
    4. Determine the time it will take to start your business and the time it will take for your business to become self-sustained.Microsoft.com: Estimate Startup Costs - 5 Tips
      1. A business is not sustainable until it can make a profit.
      2. Include enough money to cover fixed business expenses and personal living expenses for at least three months.Small Business Television Network: How To Calculate Start-up Costs: It's Part Science and Part Intuition
      3. Remember, the longer it takes to start your business, the more you should factor in for monthly fixed start-up expenses.
      4. It is very important to include these expenses when calculating start-up costs.
    5. Don't forget to include professional legal and financial services in your budget.
      • Not all businesses will need professional counsel right away, but be proactive and decide if you need to hire specialists.
    6. Figure out what you can eliminate to cut start-up costs.

  • Step 4: Calculate Your Anticipated Costs

    • Now it's time to calculate your estimated expenses. Use a worksheet and/or an online start-up cost calculator for organization and accuracy.

  • Create a Start-up Costs Worksheet

    • It's easy to make your own start-up costs worksheet, either with a program like Excel or simply with a pencil and paper. Include:
    1. A column that lists all of your expenses. Separate into:
      1. One-time expenses
      2. Fixed expenses
      3. Variable expensesSmall Business Administration: StartUp Costs
    2. A column that lists the fixed amount or estimated amount.
    3. The total amount.

  • Use an Online Calculator

    You can also try one of the following online calculators:

  • Calculate How Much Funding You Will Need

    • Take the total start-up cost amount (including the amount needed for fixed costs before the business makes a profit) and subtract the amount you have to invest. The new total is the amount of funding you will need to secure before starting the business.RBC Royal Bank: StartUp Costs

  • Conclusion

    • Calculating start-up costs is necessary before starting a business. Be as realistic and accurate as possible. Because costs and priorities may change, modify your calculations as you get closer to opening your business. Once you calculate your start-up costs, you can obtain funding such as grants, loans and other financing options. Lastly, it's better to underestimate than overestimate startup costs.

  • References for How to Calculate Start-Up Costs for a Business



 


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