Business Startup Costs

Determining business startup costs is an area that most new entrepreneurs miss by a wide margin. The excitement and enthusiasm of getting your business started usually overpowers the more sobering work of trying to figure out how much this new enterprise is actually going to cost.

Estimating your business startup costs is an important part of your pre-venture planning and will help you determine whether or not your new business idea is even feasible. This is, however, a necessary step to take before you start spending any money, or actually starting your business.

In this early visualization process, that we're calling pre-venture planning, there are 3 major phases of business startup costs that need to be addressed, as follows:

1. The R & D, or “Idea” Phase. This is the very early part of starting a new business. Costs could involve anything you need to do to prove your business idea is viable. It might include buying books, research papers, educational materials, and the like. It also might involve doing extensive research to prove that your idea is even possible. You might even have to hire a market research specialist to help you determine if there is an actual market for your new business.

   If your new business involves a new product, you may have to go so far as to build a prototype. The important thing is to think everything through before you actually start spending money on starting your business.

2. The Pre-startup Phase. This will be your estimated business startup cost for putting everything into place before you actually open your doors, or launch your business. This could include any equipment you need to buy for your new business; initial inventory; organizational costs (legal fees, accounting setup, etc.); business permits; collateral material (business cards, letterhead, brochures, etc.); pre-opening advertising; deposits on utilities, phone and Internet services; and the list could go on and on, depending on your business.

   Visualize setting up your business and then attach a dollar estimate to every aspect of your pre-startup activity—and write it all down. When you add up all these estimates, plus the estimated cost of the R & D phase, you will have a rough idea how much money you will need before you are actually in business.

3. The First Six Months of Operation Phase. For the moment, forget about any revenues you think you might receive from your business after opening. What you need to determine here is how much money you will need in reserve in case your business does not generate the immediate revenue that you expect as soon as the “doors open”—and for six months thereafter.

   Many advisors recommend a full 12 months of business startup costs in reserve, but since we are talking about "smaller" businesses here, I think six months reserve is adequate.

   This phase of estimating should include all the ongoing operating expenses you can think of that will come along after you start up. This list could include things like rent, equipment payments, utilities, phones/Internet, advertising, employees, professional services (legal, bookkeeping, web site maintenance, etc.), janitorial, and any and all the things you think you may have as an expense after your startup—and write them all down.

   It would be good to keep a running list and write items and estimates down as you think of them. You don’t need to include the costs of goods or services sold—that is for later.

3/29/12