It takes a lot of time -- and money -- to get a new small business up and running. Make sure you don't overlook any of these expenses, so you can improve your changes for success. It is important to determine how much it will cost you to open your doors for business.
Startup costs can be broken into the following categories:
The first time you go through the costs to start up your new business, you don't need to be particularly precise--a rough idea is sufficient. To determine how much you'll need for the first few months of operation, see working capital needs.
In addition, before diving in, you may want to look in the Business Tools section at the initial cash requirements worksheet for a new business. The worksheet is set up to forecast cash requirements for the start up of a new business. The worksheet is formatted with most of the cash requirement categories. All you have to do is put in your numbers. Once you've downloaded the worksheet, you can modify it to fit your own needs.
Among the professionals you may need to work with are a lawyer, an accountant, and, in some cases, a marketing or business consultant. You might as well think of them as being part of your business family because they'll play an extremely important role in your business's success or failure.
As you work through these topics, don't forget that your accountant can be a great source of information with regards to start-up costs. If your accountant has small business experience, he or she should be able to tell you whether your estimates are on target.
The general questions to ask yourself to determine if you should hire a professional are:
Suppose you know how to prepare your own financial statements and tax forms. If, however, you lose business because you're too busy doing your own accounting work, you'll have to determine whether the lost business income is greater than the cost of hiring an accountant. If it is, you should hire the accountant.
The two professionals you'll almost certainly need to work with are an accountant and an attorney. Let's take a quick look at the tasks they'll perform for you:
To find out how much a lawyer and an accountant will cost, ask your friends and business associates or call some lawyers and accountants and ask them. In most cases, a lawyer or an accountant will not charge you for an initial visit, so you can do some free comparison shopping. Make sure you call and confirm that the initial visit is free before you go.
Once you've chosen a lawyer, he or she may ask you to pay a retainer fee, which is a lump sum that you pay up front and then draw against every time the lawyer advises you. This practice is becoming increasingly common because lawyers are growing wary of providing advice on credit to businesses that may fail before the bills are paid. Some lawyers may ask you for a retainer of as much as $2,000 or $3,000. Ask around to find what others are paying.
Don't be scared off by a lawyer who wants a retainer. In some ways, it's a good method for budgeting your legal costs since you know up front how much you'll be spending.
As a new business owner, your insurance needs will depend upon the type of business you run. For example, a self-employed computer consultant who operates out of her home will have insurance needs that are significantly different than a 10-employee company that manufactures explosives. The cost of insurance, therefore, will also depend upon the type of business you operate.
If you don't have an insurance agent, ask your small business friends and associates who they use. Another source that may be more focused, more experienced, and less expensive is your industry association. Industry associations usually provide a large, predictable, homogenous pool for underwriters, which generates lower rates. They can often provide one-stop shopping for both business and personal insurance needs (e.g., liability, property and contents, life, medical, etc.).
You can sometimes save money by having all of your insurance needs met by one company. Thus, when comparing prices, don't look at just one type of insurance to make your decision. Look instead at whether you can save money by having a single company handle all of your needs.
One good way to do this is by contacting an independent insurance agent who can do the shopping for you.
Obtain bids for a complete insurance package from several different insurance agents and companies. When comparing insurance proposals, make sure you are not inadvertently comparing apples and oranges. Make sure the packages have very similar types and amounts of coverage. Below are brief descriptions of the various types of insurance that your new business may need. Remember, no two businesses are alike. Some businesses may require additional types of insurance and some may require only a few of these mentioned.
Planning your insurance needs is just as important as any of the other planning you will do or have done for your new business. It's possible to reduce your overall insurance costs by instituting certain safety procedures. Ask your insurance agent what steps you can take to reduce your costs.
You should reevaluate your total insurance package on a regular basis. Are there additional risks that you want or need to insure against? Is the amount of insurance coverage high enough or is it too high? When you reevaluate your insurance, make sure you are insuring only assets that you still own and that some assets are not uninsured.
For a more detailed explanation of all your business insurance options, see our discussion of insuring your office and equipment.
Every new business has unique advertising and marketing needs. The amount you will have to spend will depend upon your industry and your competition, as well as your personal philosophy.
Some new businesses operate with virtually no advertising and marketing budget, while others spend freely. Whatever your level, your first step should be to buy good business cards designed by a professional.
Your second step should be to have your business's name placed in the Yellow Pages. Be careful about the number of categories under which you choose to place your name--a relatively inexpensive means of advertising can quickly become expensive.
As the number of online businesses has proliferated, creating and maintaining an internet presence has become increasingly important. The site may serve exclusively to advertise the business, or it may also service as another channel through which goods or services are sold.
If you're on a tight advertising budget, consider giving free samples of your product or service for a short time. Obviously, this won't work for everyone (particularly if you own a car dealership), but it's a great way to get your product or service out to the public at a low cost.
The most important point to remember in setting an advertising budget is to spend wisely. You want to make sure that you're reaching your target market in an efficient manner.
As a new business owner, one of the first decisions you'll have to face is whether to hire someone to help you.
Employee expenses are often the largest single category of operating expenses for a small business, and the costs can make the difference between profitability and going out of business. It is also difficult to hire and fire employees, both psychologically and legally. The small business owner should consider applying "just-in-time inventory" planning to employee usage as well, utilizing part-time employees or single-project contract labor (e.g., from temporary help agencies) to obtain additional help exactly when and for as long as needed.
The way to determine employee-related costs is to project your staffing needs. When you think about your need for employees, remember to take into account non-working time, such as vacations, absences, and employee turnover. For example, what happens if you hire one full-time person and he wants to take a vacation? What will your new business do while he's on vacation?
Included among the Business Tools is a projected staffing schedule. This worksheet is an Excel template.
The worksheet is set up to be used for projecting and completing your new business staffing arrangements for a weekly time period. All you have to do is put in your employee names and the hours to be worked and it will show you and your employees at a glance the weekly staffing arrangements. This tool provides an example and a template for a weekly staffing schedule.
Once you've downloaded the worksheet, feel free to modify it to fit your own needs.
For a detailed explanation of employee hiring, including specific steps to take in the hiring process, see our discussion of recruiting and hiring. For some tips about low-cost alternatives to hiring a full-time employee, see our discussion of choosing a staffing method.
One of your biggest outlays will be the cost of setting up your physical space: your storefront, your office, your plant, or the business space in your home.
Here's a look at the costs associated with your physical space:
See also our discussion of equipping your business for more details on facilities and equipment. If you intend to work from home, your costs will be much less than if you rent space outside the home. For more information on home-based businesses, see our discussion of setting up your home office.
If you decide to open a retail business with a storefront (as opposed to a mail- order or internet business, for example), you'll have some special cost considerations that a home-based business won't have.
There are many startup costs that don't fit neatly into any category, but still need to be considered if you're to get an accurate picture of how much it will cost you to get your business off the ground:
We're attempting to determine how much money you need to open your business to decide if you need to get a loan for a portion of it. Don't forget that the interest on any loans you take out becomes part of the money that you need!
There are several different sources for obtaining the money you'll need to start your new business. If you're interested in a detailed explanation of each of the choices and how to choose among them, see getting financing for your business.
When we say "obtaining the money," we're really talking about two separate processes because banks will not lend business owners 100 percent of the funds needed to start a new business. Banks and other lenders will want you to use some of your own money.
By most estimates, a lender will expect you to contribute at least 25 to 30 percent of the startup costs. Thus, if you estimate that your startup costs will be $50,000, you will need at least $15,000 of your own money. What if you don't have $15,000? Let's take a look at some of the ways you might raise the money:
If you borrow money from your family or friends, put it in writing and treat it like any other loan. If they aren't concerned about the interest rate they will receive, set up the loan so that you'll pay them whatever the prime rate is. The IRS looks closely at interest-free loans.
Although this will protect them, you're doing it to protect yourself as well. Suppose your uncle decides to take an expensive vacation and wants his money back? The document should spell out the conditions that require you to return the funds to the lender. Suppose you want to sell your business? If you don't have any record of the loan, a prospective buyer may be scared off by an erroneous belief that there isn't any money in the business.
A cautionary note on using credit card loans. The annual interest rate is over 18 percent per year on most revolving credit cards. There are many other less expensive ways to borrow money, with lower interest rates, higher credit limits and longer prepayment terms. Examples include a second home mortgage or collateralized loans from banks or private credit companies (e.g., Household Finance).
Once you're able to raise the 25 to 30 percent you'll need, the next step is to raise the other 70 percent. Although any of the sources just listed can be used to raise this money, you'll most likely turn to one of these sources: