Business is not only about making money. A business owner needs to plan finances carefully. Smart spending and saving will support long-term business success. But first, when thinking of starting out, you need to know the cost of starting a small business.
There’s no one answer to the question: “how much does it cost to start a small business?” Launching a new business involves many different types of costs, and the expenses for a bath bomb business in your home will vary from those of a vintage clothing shop.
No matter what product or service you offer, starting a business costs money. According to US Bank research, poor understanding of small business costs is the top reason small businesses fail:
- Poor cash flow management skills/poor understanding of cash flow (82%)
- Starting out with too little money (79%)
- Lack of well-developed business plan, including insufficient research on the business before starting it (78%)
- Not pricing properly or failure to include all necessary items when setting prices (74%)
- Being overly optimistic about achievable sales, the money required, and what needs to be done to be successful (73%)
This article will outline the costs to start a small business, including:
- Fixed costs
- Variable costs
- One-time or ongoing costs
- Essential versus optional costs
- Hidden costs
Fixed Costs
In calculating how much money it takes to start a small business, you’ll want to start with fixed costs. These include:
- Rent for office or factory space
- Utilities
- Insurance
- License, permit fees
- Depreciation of an asset
- Amortization of a loan
A general rule of thumb is to have enough cash on hand at the outset to cover six months of fixed costs.
Variable Costs
Fixed costs can make it seem easy to determine how much you need to start a small business. It stays the same and can be budgeted short- and long-term. Then, there are the variable costs. One of your personal variable costs is probably your credit card bill. No matter what you promise to spend on yourself each month, the amount you owe varies.
For a business owner, credit card processing fees are a variable cost. You can’t know from month to month how many customers will use credit cards and for how much. You can try and forecast this cost, and you should, but it is tied to sales. So, it will fluctuate.
Other variable costs to budget for in the average cost to start a small business include:
- Materials for your product
- Supplies that help you maintain your equipment
- Sales commissions
- Marketing
- Delivery and shipping charges
One-Time or Ongoing Costs
It’s also important to differentiate between your one-time and ongoing costs. For example, someone opening a donut shop would need to invest in the machinery to mix the dough and cook the donuts. This would be a one-time cost. Or, they might rent someone else’s kitchen space to avoid the steep, upfront costs. The kitchen equipment rental would be ongoing, a regular expense that is part of the cost of running a small business.
Ongoing costs include your operating costs such as the amount you pay to any employees, the cost for your business website and domain name, supplies and equipment, etc.
Essential Versus Optional Costs
Shopify research determined, “small business owners spend an average of $40,000 in their first full year of business.” The average startup costs for a small business vary, though, depending on the number of employees. A solo entrepreneur, for instance, might average $18,000 per Shopify. Yet, business owners with one to four employees were looking at $60,000. That makes the decision of whether to start out with others on your team a choice between essential and optional costs. The bath bomb business may not need anyone else. But, the bookstore owner is more likely to see a second employee as essential unless they want to be onsite for all business hours.
The hardware store owner must pay rent for the storefront and utilities to keep the lights on. Those are essential costs. But paying an extra one month for an ad in a student yearbook or a big “sale” banner is optional. The business could benefit from the added marketing, but it isn’t going to decide if the store can open for business or not.
When figuring out how much to start a small business, you’ll come across both essential and optional costs. The essential ones will have priority. If you have the budget, some optional costs could make sense too. Still, when it comes to managing your cash flow, it is often a good idea to hold off on major optional spending until you have some reserves.
Hidden Costs
Sorry to say it, but you can’t plan ahead for every cost. Especially in the first year of starting a new business, the entrepreneur is likely to encounter unexpected costs. In the Shopify research, the four most-cited hidden costs for running a business were:
- Shipping
- Legal
- Inventory and product
- Taxes and accounting
It’s a good idea, then, to build a contingency fund into your average cost of starting a small business.
Fully Cost Out Your Cost of Starting a Small Business
There’s a familiar saying, “It takes money to make money.” However, blindly following that mantra could mean pouring much more than the average startup cost for a small business into your launch. With this overview of the cost of opening a small business, you can better plan and manage your spending.
Budgeting to begin small is a much safer approach. Your prospective business idea may take off, but no matter how great your idea, it is unlikely to take off and earn you millions right away. Invest time and effort in the research to determine the cost of starting a small business; it will pay off in the long run.
