Basic Finance Care Finance tips
For many, starting their own business is a dream they have nurtured for years. But the thrill is often accompanied by feelings of stress, doubt and apprehension. Some of this is because starting your own business can be incredibly financially risky. It is often your savings or money borrowed under your name on the line.
So exactly how much will it cost to start your dream business? The Kauffman Foundation estimates yearly overheads for a small business at $30,000, with the number increasing as the business ages. However, in your first year you will also be forced to shell out additional payments for start-up costs. You may need to buy tools, equipment, vehicles, furniture and more. If you dream of starting your own business but don’t want too much financial risk, consider starting a home-based business or a micro-business. These types of businesses have lower start-up costs.
How much does it cost to start your own business?
For many business owners, crunching the numbers and determining their start-up costs is very scary. Many entrepreneurs may not have the skill or expertise. A great way to start is by constructing a business plan. Among other things, your business plan will include your financial projections – your estimated revenue, expenses and overall profit over a 1, 3 and 5 year timeline.
To settle on a realistic financial projection, you can use SBA’s start-up costs worksheet or Gusto’s start-up budget spreadsheet. You need to know your numbers before you can begin to approach banks and investors to raise start-up funding.
Many of your projected costs will be recurring. Recurring costs include payroll, rent, power, insurance and more. You should include 6 months of upfront rent as a start-up cost. You want to have a safety net while you work on growing your business, attracting customers and eventually turning a profit. Many new businesses are not profitable for the first few months.
| STARTUP EXPENSE | ESTIMATED COST |
| Equipment | $10,000-$125,000 |
| Office Space | $100-$1,000 per employee per month |
| Marketing | 0-10% of total budget |
| Website | About $40 per month |
| Utilities | About $2 per square foot of total office space |
| Payroll | 25-50% of total budget |
| Professional Consultants | $1,000-$5,000 per year |
| Insurance | An average of $1,200 per year |
| Taxes | Variable but 21% corporate tax rate |
| Travel | Variable |
| Shipping | Variable |
7 Business Start-up Costs
Every business offers a different product or service and will have a unique business model. This means the exact start up costs for each business will also be different. Here are some rough figures that you can use as a starting point when constructing a start-up budget:
#1 Equipment: Up to $100,000
Most businesses require equipment to run. If you are running a consulting business you may already have a home office and computer system adequate for your purposes but most small businesses will need to purchase their equipment immediately. This can cost in the hundreds of thousands.
A plumber, sparkie or builder will need their own ute or van and make sure they have the correct tools. A restaurant owner will need to buy a fridge, oven, commercial sink, grease-trap and fit out for their restaurant. If you take on employees, you will need to buy equipment for them as well.
#2 Office space
Regardless if you rent or buy your new premises, you can expect to make monthly rental/ mortgage payments of $100-$1000 per employee.
To keep your start up costs and ongoing overheads down, you can consider working from home, remotely or using co-working spaces. Some service-based businesses may not need an office, i.e. tradesmen.
#3 Marketing
When you think of marketing related costs, you might think of printing signs, banners, flyers and business cards. You might also think of paying TV stations, radio stations and magazines to run your advertisement. However before you can publish and distribute marketing material, you need to have a strong marketing plan in place. You might need to hire a marketing consultant or manager. This is another initial or ongoing expense for your business.
Fortunately, online marketing is incredibly effective and can be done more cheaply than more traditional advertising methods. Small businesses can make great use of social media websites, SEO optimisation, email advertising campaigns and more.
#4 Your business’s website
It is shocking how many businesses do not have a website these days. Many customers search for a product or service online and your website is often the first time they come into contact with your business.
Even if you are not tech savvy, you can use online website building services such as Wix, Weebly, WordPress or SquareSpace to construct a beautiful and professional looking website. To use these providers, you will usually have to pay a monthly or yearly subscription fee. You can also hire a web developer to create a website for you. This will have an initial upfront cost as well as ongoing maintenance costs.
#5 Utilities
On top of rent, you will need to pay for gas, water, electricity, internet, phone bills and other utilities.
A rough rule of thumb is to allocate $3 per square metre of office space and use this figure to calculate your utilities bill. If you will be using a heater or air conditioner expect your electricity and gas bills to be higher.
#6 Payroll
Whether your business is turning a profit or not, you will need to pay your employees their salary. You will also need to pay yourself a salary for all the hours that you put into your business, unless you have an alternative source of income to fall back on. Payroll includes superannuation, commissions, overtime, and other forms of compensation or extra payments.
We suggest keeping your payroll costs to 25% of your budget or less.
#7 Insurance
You’ve put considerable time and effort into building your business. Despite your best efforts to keep everything running smoothly, accidents can and do happen. Consider taking out Business Insurance. Business Insurance* is an insurance package designed to provide cover for your business contents, stock, tools and commercial premises when an insured event occurs (such as fire, storm, theft or even accidental damage). A Business Insurance package can also cover your portable equipment, glass and for loss of revenue due to business interruption in specified circumstances. In addition, cover is available for public liability, tax audit, employment practices and statutory liability risks.
If you offer service or advice you will also need to consider Professional Indemnity insurance. Professional Indemnity (PI) insurance* is an important form of protection for businesses that provide specialist services or professional advice. It is designed to respond to claims against your business for losses as a result of actual or alleged negligent acts or omissions in the provision of your professional service or advice. PI Insurance will also assist with the legal costs associated with responding to or managing claims which are covered by the policy.
The price of your Business Insurance and Professional Indemnity insurance will vary depending on the nature of your business. Some important factors that are taken into consideration include the size of your business, its annual revenue, the value of your premises and possessions, how many employees you have and more.
How to finance your start up
While starting a business is never cheap, there are many ways that you can save yourself some money. Sometimes you may need to think outside the box or do a little research.
For instance, you can use a bookkeeping program like QuickBooks instead of using a chartered accountant. You can buy your equipment and furniture second-hand, at warehouse sales, or you can buy ex-display models.
Just be sure to never cut corners by buying lower quality products. And if you really need a consultant, accountant, lawyer or bookkeeper, you should go ahead and hire one. You could save yourself a lot of trouble and money down the line.
Securing funding
Once you’ve put together a list of start up costs for your new business and done your financial projections, you will have a clearer idea how much capital you need to get it off the ground.
If you do not have deep pockets you will most likely need external financing. Even though you can take out a business loan later down the track, most banks are very reticent to lend to new businesses without a proven track record of profitability and the ability to make repayments.
You can look at alternative options like peer-to-peer lending, angel investors and business credit cards. Business credit cards will often have higher limits than personal credit cards. Just be sure to cost how much credit debt you can sustain.
