Business start-up costs: How to calculate and budget (2023)

Starting a business involves a variety of costs, which may require you to seek outside business financing. In fact, entrepreneurs register millions of business applications each year in the US. The number of new business applications rose to a record 4.5 million in 2020, according to the Economic Innovation Group.

If you're working to start your own business, it's crucial to understand the different costs you may face. Knowing the possible start-up costs in advance better prepares you as an entrepreneur and can improve your chances of success.

How to Calculate the Cost of Starting a Business

There is no fixed cost forTo start a business—Many factors can affect your initial start-up expenses. In some cases, you can start a business with just a few thousand dollars. Other small business owners may need to reach five figures (perhaps several times) within their first year of operation.

With such a wide range of potential expenses, it's helpful to start with a business plan. A separate initial cost analysis can also help you estimate your costs. The US Small Business Administration (SBA) provides free guidance and sample worksheets you can use for both.

• SBA Business Plan Examples
• SBA Startup Cost Worksheet

Taking the time to write down (and add up) your initial start-up costs is a smart move. That extra preparation up front can lead to more realistic expectations and better long-term results for your new business venture.

Common Business Start Up Costs

Review the common business startup costs below to determine what expenses your business may face.

Training Fees ($145)

One of the first tasks you will need to complete when forming a new business is choosing a business entity. General business structure options include:

• sole proprietorship
• Camaraderie
• Corporation
• limited society(LLC)

The average cost to register a business is $145. However, registration fees and other associated costs may differ depending on the state in which you operate.

Research expenses ($100 to $30,000 or more)

Researching the market you plan to enter puts your company in a better position to succeed. Some entrepreneurs try to do this research on their own. However, hiring a professional market research firm can give you a clearer picture of the industry, your target customers, and the competition.

The price of market research can vary depending on the type of report and the guidance you need. High-level market summaries can cost anywhere from a few hundred to thousands of dollars. By comparison, a more detailed, custom design can cost at least $30,000.

Equipment ($11,000 to $125,000)

Regardless of your type of business, you probably need some type of equipment to function. Even small online businesses need access to a computer or device and an Internet connection. Other types of businesses may have much more demanding equipment needs that can cost tens or even hundreds of thousands of dollars.

Below are examples of initial equipment costs for several different types of industries. (Your experience may be different.)

• Hotels and restaurants:$ 125.000
• Real estate and rentals:$ 75.000
• Insurance and finance:$ 52.000
• Retail Establishments:$ 32.000
• Medical assistance:$ 27.000
• Storage and transport:$ 16.000
• Arts and Entertainment:$ 16.000
• Service-Based Businesses:US$ 14.000 a US$ 18.000
• Construction:$ 14.000
• Support to other businesses (administrative or janitorial):$ 11.000

Office space ($300 to $1,230 per month, per employee)

With certain types of businesses, you can operate from your home. But if your business needs office space, the cost of renting or buying a facility can add up.

Just like home rent and mortgage costs, the price of securing office space for your business has a lot to do with its location. The size of your office will also influence the price you pay.

The cost of office space starts at around $300 per month (per employee). However, in high-cost areas like San Francisco or New York, the monthly cost of your office space can be more than $1,230 per person.

Utilities ($2.14 per square foot)

In addition to the monthly rent or loan payment for office space, you should prepare for the additional expense of utilities. For commercial buildings, the average cost of utilities is $2.14 per square foot, according to the International Association of Building Owners and Managers. The larger your office space and the more employees your business has, the higher your utility costs will be.

Inventory (25%–35% of operating budget)

If your business plans to sell products to customers, you'll need to have some inventory on hand to fill orders. Inventory costs may require a significant financial investment. But the actual amount your business needs to spend here depends on a number of factors.

Most companies that need inventory spend between 25% and 35% of their operating budgets on related costs. Initially, it can be difficult to estimate how much your business will spend in this category. To estimate potential inventory costs, start by calculating how much product you expect to sell in a 12-month period. Then divide that number by 10, with the goal of keeping 10% of your annual inventory needs in stock.

Let's say you plan to sell $75,000 worth of inventory next year. If you wanted to keep 10% of that number available to sell to customers, you would have to buy $7,500 worth of inventory.

Marketing and advertising (up to 7%–8% of revenue)

Advertising your business is essential. But you have to be careful not to go overboard with marketing and advertising expenses, especially as a new business.

The SBA advises limiting your marketing expenses to 7-8% of your income. However, if your profit margins are low (less than 10%), you may want to adjust your marketing budget until those numbers improve.

Website Development (up to $10,000)

Creating a professional online presence is essential for most businesses. The question you have to answer as a startup is whether you want to hire someone to create a website for your business or try to do the project yourself.

Depending on your skill set and time constraints, you can create your own starter site. Services like Squarespace and WordPress have templates available that can make work easier and much more accessible. If you hire a professional website designer to develop your website, the cost can range from $2,000 to $10,000. However, website packages often include branded services that can also benefit your business.

Office supplies and furniture ($200 to $1,000 per month, per employee)

Whether you're operating your business from home or have dedicated office space off-site, chances are your business will need to spend some money on office supplies. Depending on the type of business, you may need to purchase:

• chairs and tables
• Computers, tablets and software
• phones and headphones
• Furniture and appliances for living room
• waiting room furniture
• Cabinets
• articles of paper
• Ink, toner and other printing supplies
• Pens, clips, staples and notebooks

You can spend anywhere from $200 to $1,000 per month (per employee) on office supplies. But these costs can vary wildly, depending on your budgeting options and the types of benefits you want to offer employees.

Payroll (15% to 50% of your budget)

Payroll is one of the biggest expenses most businesses face. However, finding quality team members and providing them with fair and competitive compensation is crucial if you want your business to thrive.

For many companies, payroll costs represent 15% to 30% of the total budget. Some companies spend up to half of their budget on payroll expenses and still generate significant profit margins.

In addition to wages and salaries, be sure to include the following costs in your company's payroll expenses:

• commissions
• prima
• Benefits
• paid time off
• overtime pay

Professional Consultants ($75 to $400 per hour)

As a new business, there may be many tasks that you try to manage yourself to save money. After all, the cost of professional services can be expensive, ranging from $75 to $400 per hour.

However, for certain jobs, hiring a professional can be a smart investment. Forlegal matters, hiring a lawyer for advice and guidance can help you avoid potentially costly mistakes. Working with a CPA or accountant can help your business ensure that it meets its tax obligations as required.

Insurance ($46–$86 per month, per policy)

Insurance is another important cost to budget for as a new business owner. Depending on the type of business you operate, some types of business insurance coverage may be more important than others.

Below are some of the insurance options you may want to consider, along with the average monthly premium for each.

• Workers Compensation:$86 per month
• Overall responsibility:$53 per month
• Business Owners Policy:$84 per month
• Professional responsibility:$46 per month

If you buy multiple business insurance policies with the same provider, you may qualify for a bundle discount that can help you save money.

Taxes (cost varies)

Benjamin Franklin once wrote that nothing is certain in this world except death and taxes. So it should come as no surprise to him that his new business also has tax liabilities to pay.

Your business structure, income and expenses can influence how much your business has to pay in taxes. Working with a CPA to calculate your tax requirements and research potential savings strategies is often your best bet.

The corporate tax rate is currently 21%, but there have been recent proposals in Congress to increase this number. In general, it is advisable to save at least 25% of business profits, but you should speak to a reputable tax professional for guidance.

How to get business financing for startups

Finding the funds to cover start-up costs, not to mention other business expenses that may arise, can be challenging. But the right business financing has the potential to break down large expenses into smaller payments that are easier to manage.

If you're interested in applying for a business loan, figure out how much you can pay each month so you don't get overwhelmed. Then take the time to research and comparebusiness financing optionsto ensure you find the best deal available for your business.

Related: The best loans for startups