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How to Estimate Startup Costs for Your New Business

what are the startup costs of your new business

So you have a fantastic idea for a new business. You’ve thought it through and still think it’s a solid one. Next, you’ll need to understand your startup costs.

Of course, at this stage, you’re just making a best guess. Almost certainly, your guess will be wrong and will probably be too low.

Still, having a rough number will help you understand if your dream is realistic. It’ll also prepare you for how hard you’ll have to work to get to the Grand Opening stage.

So, below are some categories to think through to help you make that rough estimate of your startup costs.

Include Everything You Can Think of in the Startup Cost Estimate

You already know what kind of business you want to start, so it should be easy for you to rattle off a long list of items that you’ll need to run the business. Brainstorm and write everything down. You won’t be able to keep so many things in your head.

Below is a non-exclusive list of categories to think through. The list won’t fit every type of business, but, hopefully, it’ll provide you with a good place to start your own checklist:

  • Cost of materials (if manufacturing)
  • Cost of goods (if reselling)
  • Labor (include Social Security and Medicare payments and worker’s comp insurance)
  • Manufacturing equipment (e.g. tortilla machine)
  • Operating equipment (e.g. cash register)
  • Cost of miscellaneous materials (e.g. product packaging, bags, paper cups, napkins, plastic utensils, shipping boxes, gas/mileage)
  • Shipping/delivery
  • Rent
  • Utilities
  • Internet/website (cost to build and cost to maintain)
  • Licenses/permits
  • Subscriptions/office supplies/office software and hardware

You’ll almost certainly add more items to the list as you go along. But that’s OK. You have a great start already.

Use the Internet to Find Estimated Pricing

You should be able to find most, if not all, of the pricing information you’ll need on the internet. But don’t forget the value of a phone call. Sometimes, it’s the fastest way to find the answer.

Be generous in your estimates. Overestimate instead of underestimate.

If you plan to open a restaurant, find out the pricing for new equipment. You’ll probably end up buying at least some second-hand equipment, but pricing everything new gives you some flexibility if you can’t find a particular equipment second-handed.

Understand How Much It Costs to Prove Your Concept

If your business idea is of a new widget, you’ll most likely need to build at least one prototype before you can convince investors to help you fund your business. This means you’ll have to figure the prototype costs into your startup cost estimates.

You might have to hire an engineer or designer to turn your sketches into technical drawings that can be used in manufacturing. Often, the prototype parts are machined by hand, so they get expensive. (Molding costs are expensive too, but that’s at the mass production stage.)

You’ll have to do some research for local machine shops to see if someone can help you. If your business idea is an app and you don’t know how to code, you’ll have to add the cost of hiring a programmer to your startup costs.

If you want to run an online store but have never built a website before, be sure to add a website developer’s fees. Some platforms like Shopify or Square claim to have easy do-it-yourself webstores, so look into their platform fees too if you’re feeling adventurous.

Kickstarter is a place where you can find manufacturing help. Sometimes, you can hire freelancers through websites like Upwork or Fivrr.

Add Legal and Accounting Services to Your Startup Costs Too

We will have articles that touch on the legal and accounting costs of starting a business. For your initial startup cost estimate, just know that these fees can add up. It all depends on your idea and the type of business.

Your legal costs can range widely. If you wish to file a patent application to protect your invention, your legal costs can immediately go up by $5,0000-$10,000. However, if you plan to protect your business idea in a different way and you want to start small, your legal costs can be less than $100 if you’re willing to do file some of the paperwork yourself.

In between the two extremes, you’ll need to decide if you want to run your business as a sole proprietorship, a partnership, a corporation, or an LLC. With some of the business formats, you might need some help with the paperwork.

Depending on your experience level as a businessperson, this can range from less than $100 if you do it yourself to several thousand dollars if you hire a lawyer to tailor the documents to fit your needs. (Hiring a lawyer is highly recommended if this is your first business.)

As to an accountant, you should probably use one if your business takes off. Again, depending on your level of experience with accounting matters, at the startup stage, you can probably get by with an accounting software like QuickBooks, FreshBooks, or similar. Eventually, though, it’s probably a good idea that you hire an accountant to help with your accounting and tax needs.

Even if Your Startup Costs are High, You Might Not Have to Give up on Your Dreams

If your idea involves sending a person to the moon and back and you’re not one of those space billionaires, you might want to admit that the dream isn’t very realistic. However, if you just want to start a restaurant but don’t have the savings to buy the equipment and rent the space you need, there might be other creative, out-of-the-box ways to get you that restaurant.

Instead of a physical restaurant, you might do a food truck. Or you might open a virtual kitchen. You can take orders over the internet and deliver through Grubhub or similar.

Instead of opening a large manufacturing facility, maybe start your business on a smaller scale. If you want to make custom leather backpacks, instead of renting a space, just find a room or a corner in your home. Set up the workstation, make the goods, and sell them on Etsy for a few months to test the market.

As you make the backpacks on a smaller scale, you might come up with sensible ideas on how to scale up. Certainly, you’ll at least have sales numbers to maybe get a bank loan.

Think Flexibly and Break Your Grand Plan into Smaller Steps

Think Flexibly and do your research. Talk to people in the industry. Often, some of the money-saving ways have already been thought of by other folks. Some of them are even willing to share. All you have to do is to ask and listen.

While your ultimate vision for your business might be grand, don’t forget that you can take smaller steps to test out your idea. When you add up all the steps, you’ll get to your goal.

Ultimately, that’s the point of this startup costs budgeting exercise.

Interested in starting and running a small business? Here’s the beginning of our step-by-step guide: What to do right after getting that great business idea.

Questions? Comments?