How to Calculate Your Business Start-Up Costs

Do you dream of owning your own business? Before launching a new business venture, it is essential to secure enough money to run the business in the foreseeable future, giving your business the best possible start in life.

On average, many UK startups budget £5,000 to launch a new business. Although, with the average UK startup spending £22,756 in its first year, it is unsurprising that only 44% of businesses survive past their first five years.

It is, therefore, vital that you calculate your business start-up costs accurately, considering unforeseeable events and long-term running costs.

In this article, we will explore how you should calculate your business start-up costs and the impact this will have on the longevity of your business.

What Are Business Start-Up Costs?

Business start-up costs are the costs incurred when you start your own business. However, start-up costs do not just refer to expenses in your bank account up until your business launch date. 

They also include the running costs to operate the business during the first few months of the business’s lifespan. In fact, some savvy business people include the costs to run the business during its first year as the business’s start-up costs.

Why Should I Start a Business?

Starting a new business venture is a true adventure, filled with highs and lows. However, individuals start a new business for many different reasons. 

Here are the top 5 reasons for starting-up a business:

1. Power and Control

Starting a new business and rejecting the traditional work roles gives you power and control over your life. You may decide to invest in property so you can decide your career path and can make it happen. This is the most popular reason why people start a new business.

2. Personal Freedom

Being tied to the desires of employers and other business partners can limit your own freedom. Starting a new business by yourself and investing can give you the personal freedom you need in your career so you can make your own decisions when you want.

3. Entrepreneurship 

Do you have a great idea that you need to put into practice? Some people start a business because they have the entrepreneurial skills to invent a product and see a gap in the market. 

4. Beating the Boss

Perhaps you have worked for an employer for many years and your experience enables you to see how processes can be done in a better way? Use your skills and contacts to launch a more efficient business, this time being the boss.

5. Unemployment

If you are out of work and have exhausted all other avenues, you might consider starting a business as your final option. If you are lucky enough to have a skill set, you could incorporate those skills into your new business.

Why Do I Need to Calculate Business Start-Up Costs?

Being prepared in business is the key to success.

Budgeting the costs you expect to pay and the unforeseen expenses that could arise will mean that your finances are sound and that you can pay your bills. This will mean that you can make better decisions to help the growth and profitability of your business.

However, it is easy to underestimate the costs that you need to account for in a business, especially if your business is yet to launch. Most new businesses fall at this first hurdle, failing to have enough money to operate the new business to its full capacity. 

Calculating business startup costs will help you to:

• Decide if your new business is viable.

• Assess all possible sources of finance.

• Determine how many people you can employ.

• Total all costs associated with each area of the business.

• Show lenders that you are realistic and knowledgeable about business costs.

Are There Different Types of Startup Costs?

You must calculate start-up expenses to get the business off the ground as well as running costs once the business is operating. 

Start-Up Expenses

These costs are sometimes referred to as ‘sunk costs’ as they are spent to start a new business regardless of subsequent success. These costs include:

• Marketing: creating a new website, designing a logo, and advertising across social media, as well as traditional strategies such as printing brochures and business cards. 

These startup expenses are essential to advertise your new business to potential customers and to let the customer know who you are and what products or services you can offer.

• Fees: accountancy fees, legal fees, recruitment fees, and registration fees may be required before your business begins its operations. For example, you may pay a service for someone to write a professional business plan, or register your business with Companies House.

Start-Up Assets

These costs are spent to purchase assets for the business. They are costs to factor into starting up your business, yet you will receive value from each asset as the business operates over time. These assets include:

• Equipment: depending on the nature of your business, you may need to purchase equipment. Examples include kitchen equipment if you are opening a restaurant, or a heat press and vinyl cutters if you will be running a t-shirt printing business.

• Vehicles: a delivery vehicle may be required by your business and will be a start-up asset to factor into your calculations.

• Premises: if you are purchasing your own premises, this will be another startup asset to consider. Make sure you are aware of any additional charges or fees, such as service charges.

Ongoing Costs

Once your business has launched, you will pay ongoing costs as the business operates. These costs are typically split into fixed and variable costs. Fixed costs never change, regardless of whether you are making a profit or a loss, whereas variable costs will change depending on the amount of products produced. 

• Fixed costs: these costs are paid regularly and rarely change. Examples include rent on your premises, or insurance. These costs are pre-agreed in a contract, for example when signing a lease for premises or an agreement for insurance premium.

• Variable costs: these costs change depending on how many products you produce. The more items made, the higher your variable costs. The fewer items made, the lower your variable costs. Typical examples include the raw materials used to make the products you make, along with the packaging used.

Which Start-Up Costs Should I Calculate?

Business startup costs will vary depending on the type of business you are launching and the industry you are going to work in. However, most small business owners will face some common start up costs for a business.

Market Research

Finding a great idea is the backbone of all successful businesses. Consumers will notice your business and will be intrigued and enticed into making a purchase. However, without a great idea, your business will not stand out from the crowd and will not grab the consumer’s attention. 

To find that great idea, conduct market research and find out what consumers want. You can use the internet and social media to read comments posted by consumers and find out what they like and dislike about competitors. Find out if there is a common need that is not being addressed by the competition.

Once you do have a great business idea, go further with your market research and discover what potential customers think. Distribute questionnaires and surveys, and conduct interviews and discussions, finding out if customers will buy your product. What price would they pay and how frequently would they buy it?

You can complete market research yourself, although it is time consuming and unreliable if it is not completed professionally. Paying a company to conduct this research for you will provide expert results and analysis, although it will cost a significant amount.

Equipment

Once you know what business you want to open and what great idea will stun potential customers, find out the cost of the equipment you will need. Estimates are not appropriate, however, as you will need precise figures to enter into your calculations.

Ensure to think out of the box when considering your equipment. For example, in a pizza restaurant, you will need equipment to mix and press dough, shred cheese, cut toppings, proof the dough, cook the pizza and warm the pizza. 

You will need pizza stands, pizza boxes and delivery bags. You will also need refrigeration equipment as well as cleaning equipment, such as a dishwasher.  

Do not make the mistake of missing out on vital equipment that you need to run the business.

Premises

What type of premises will you need for the business? Do you need a physical premises or could you work from home? 

Renting or buying premises for your business will be your biggest cost by far, particularly with current rising interest rates and business rates along with uncertainty in the UK property market. Economics experts are predicting a brief fall in prices before a significant surge once again.

As a new business owner, you need to try to keep your costs as low as possible. So, if you can work from home or from a warehouse base, you could save yourself a great deal of money. 

Most customers will look to the internet to order food and clothes so investing in an engaging website would be more productive than paying a high price for premises. However, whether this is viable for your business will depend on the industry you are entering and the products you are selling.

Website

An engaging and user-friendly website is essential for your business. Across the UK, there are almost 60 million e-commerce users, demonstrating the dominance of shopping online. In fact, the forecasted retail e-commerce sales could reach 38.1% by 2025 in the UK, a figure that is rising year on year.

You can design your own website, write your own content and use template designs. This will cost you a small amount each month as a subscription. 

Or, you could seek the services of professionals to create an expert website that drives internet traffic and searches. This will cost you a significant amount although will increase brand awareness and potential sales significantly.

Utilities

Do not forget to factor your utility costs into your calculations. You will need to estimate electricity, gas, water and broadband for your business, including if you have chosen to work from home.

You could find an office space that includes utilities with the cost of the premises. However, this is not typical for other types of commercial premises.

Stock

Calculate the cost of your stock and how much you will need to buy when the business launches. Find realistic quotes for these items, remembering to check all best before dates when dealing with food.

Inventory management software might be useful to keep on top of your stock levels. It is important to ensure that you do not order too much stock, as the stock may become obsolete or out of date. Yet, you must also order enough stock so that you do not disappoint the customer.

Employees

You will need to estimate how many employees you will need to recruit. This will depend on your business, however. You could employ the services of a recruitment agency to take care of employment for you, although they will charge a fee.

Professional Fees

Remember to factor professional fees into your costs. These fees include legal and accounting fees, as well as registration and administration fees. The type of fees you will need to pay will vary on the type of business you are launching, however, as well as the size of that business.

Marketing

Letting customers know about your new business and the products on offer is vital. You could employ the services of marketing experts, printing banners and leaflets for a cost. Or, you could focus on digital marketing, primarily social media. 

A great social media campaign can let potential customers know about your business in an instant. You can build brand awareness across social media platforms and create a viral gimmick that attracts attention. The great news is that social media marketing is free for you to implement, keeping your costs low.

How Can I Calculate Startup Costs?

When calculating startup costs, create a list of all start-up costs you need to calculate.

This includes your startup expenses and assets as well as your ongoing fixed and variable costs. You could list your costs on a spreadsheet so you can easily total your costs and make amendments. 

Consider your costs from the launch day of your business and throughout the first year of operation. You might find it useful to split your costs into one-off startup costs needed to launch the business, startup assets and ongoing costs to operate the business. You can get a range of prices from online searches, speaking to suppliers and similar businesses.

You will need to accurately research the costs you include in your calculations. For example, asking a professional to write your business plan can cost anything from £500 through to £25,000. Which type of business plan will you need? Seek a quote from a professional so you can include an accurate cost.

Follow these steps to calculate your start-up costs:

1. Business Launch

Write down all the items you need to launch the business. These are your start-up expenses and assets and are required to open your business on the first day. Such costs are typically one off costs. Consider start-up business loans or using savings accounts to pay for these expenses.

If you are opening a pizza restaurant, you will need kitchen equipment, furniture, and a cash register, amongst other costs, so you can begin trading. These are one-off startup assets that you should not need to replace for a very long time.

Your one-off startup expenses, or sunk costs, will include legal and registration fees and perhaps accountancy services or accounting software. Again, you need to pay these costs to launch the business and are costs that will not be repeated.

2. Monthly Fixed Outgoings

You should then list all of your fixed costs for the next 12 months. Fixed costs should be easy to calculate as they are rigid costs that do not change. For example, if you know your yearly premise rental cost is £24,000, you can calculate that each month you will need to pay £2,000.

3. Monthly Variable Outgoings

Next, list all of your predicted variable costs for the next 12 months that will leave your business bank account. Variable costs are more difficult to pin down and make an accurate calculation, however, as variable costs depend on how many products are produced.

You must first work out how much it will cost to produce one product. So, if you are making pizzas, work out the cost of the ingredients, labour, packaging and utilities required to make one pizza. This is your unit cost.

Then estimate how many products you think you will sell in a month. For example, you might estimate selling 200 products in one month and progress your sales estimation by another 100 products each month across your first year. 

Finally, multiply each monthly estimate of products produced by the single unit cost. So,if you have worked out that the unit cost for one pizza is £4.20, it will cost £840 to make 200 pizzas in your first month, £1,260 to make 300 pizzas in the second month, and so on. These are the variable cost figures you will enter into your cost calculations.

How Can I Fund Startup Costs?

Most new businesses fund their start-up costs with start-up business loans. You can apply for secured loans and unsecured business loans from a range of lenders, or apply for business credit cards as other finance and funding options. 

Business credit cards can be a good source of funds for startups, although you may only be able to apply for a small amount at first. A business loan broker could help you to secure the best deal and the best rates.

If you do apply for finance, you must remember to factor your monthly repayments and interest into your costs, however.

Other possible sources of money include government grants or loans from the government-backed British Business Bank. You must meet a strict eligibility criteria, however. Crowdfunding is fast becoming a popular method to raise money, although you will need a dominant social media presence.

At a Glance, Pros and Cons

Do you want a clear overview of the pros and cons of calculating start up costs for your business? If so, this section is for you.

Pros

✔️ Accuracy — you know the precise costs of starting a new business so you know what to expect.

✔️ Strength — you will provide your new business with a strong foundation to build on, being prepared for unforeseen circumstances.

✔️ Clear cash flow — know what money is expected to flow into the business and what money is predicted to flow out of the business.

✔️ Longevity — a fully prepared business has the best chance of long term survival so give your business the best chance. 

Cons

❌️ Unexpected costs — there is always a good chance that further unexpected costs may arise, which may be difficult to pay for if you do not have a contingency budget.

❌️ Unpredictable sales — you could realistically estimate your potential sales, although you cannot be certain that those sales will come to fruition. 

❌️ Cycle of debt — borrowing money to fund your startup costs may propel you into a debt cycle.

❌️ Outside influences — rising interest rates will have a negative impact on your finances. The current bank rate has risen to 5.25% and may rise further before calming down. 

This has impacted all areas of the economy and is a factor that no business can control.

Calculating Start-Up Loans for Business: Final Thoughts

Launching a new business can result in many unpredictable factors that are out of your control. However, fully preparing for as many startup costs and ongoing costs as possible will provide your business with a fighting start and a strong chance of longevity.

Being prepared is no guarantee of success in any industry. However, covering every base and considering every possibility will increase your chance of business success.

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