What Costs Are Involved In Starting A Small Business?
Before You Launch: How Much Does It Cost To Start A Business?
As a kid, you (or your parents) had to think about the cost of your start-up lemonade stand. There was the cost of lemons, sugar, cups, your time, and the posters for marketing. Now your idea for a business is probably a little different than a lemonade stand, but the general principles around startup costs remain the same. Finances are often the biggest concern for entrepreneurs.
But turning your business dream into a reality is even more fun than it was to open up your first lemonade stand—and it’s a lot more rewarding. It’s time to get an in-depth understanding of how much it’s going to cost to launch your business. Entrepreneurs can organize startup costs into five general categories: establishment, housing, staffing, stocking, and marketing. Costs will vary from business to business. Still, there are ways to estimate how much cash you’ll need in each category to get up and running.
Startup Costs To Prepare For When Starting A New Business
Here’s a deeper look at the five categories to get your business started:
1. Establishing Your Business
Let’s imagine you’re opening up a landscape service in Arizona. First thing you have to do is establish your business. The initial costs relate to establishing your business as a formal entity. You’ll need to decide how to organize your business: sole proprietorship, limited liability company (LLC), etc.
Once that’s done, you’ll need to file paperwork with the state where you’re opening your business. State fees vary. For example, you’ll pay $500 to establish an LLC in Massachusetts. Then you’ll pay a $500 renewal fee each year. For your landscaping business, you’ll pay just $50 with no ongoing expense to be an LLC in Arizona.
There is also the cost of business licenses to think of. Every city will require you to have a business license. And if you’re selling online, you’ll need federal business licenses. These licenses vary depending on where you are located. Plan on getting at least one business license, but set aside some money in case you need additional ones. Since you’ll be cutting grass and gardening, you just need the Arizona state business license. That will cost us $168.
2. Housing Your Business
Finding the right space is one of the most exciting parts of opening a business. If your business serves consumers (B2C) or you’re selling a physical product, you might want more space. If your business serves other businesses (B2B) and you’re selling services to remote clients, you’ll probably be fine with a smaller space. You have four main options when searching for a place to do business:
- Home Office: Have a spare room? Set up a home office, and you’ll be able to deduct a part of your mortgage and utilities as business expenses. In our landscaping business, you won’t need much of an office. But, if you plan to store your equipment at home, you can use this as a tax deduction.
- Co-Working: Co-working spaces are commercial buildings where freelancers and small business owners can rent space. Check out providers, like national WeWork. In big cities, there should be no shortage of local co-working providers in your area. In rural areas, a different option may be easier for you.
- Sub-Leasing: Sometimes, companies have too big of a building for their current workforce. They may decide to sub-lease, or rent out a portion of their building, to others. Check for sub-leasing opportunities on marketplaces like Craigslist. It’s a great way to try a place out or get it for a better price.
- Renting: If you need storage and a place to do business with customers and clients, you’ll need to rent your own space. This is likely the most expensive option. You can talk to commercial real estate agents to find properties, or check out LoopNet for commercial listings.
Office space expenses are going to vary based on your market and type of business. Just remember to check out the hidden costs. For example, co-working prices are often all-inclusive. You pay a monthly fee and you get it all, even free coffee in some cases! When you rent your own office space, you may be paying taxes, insurance, and even maintenance fees depending on your lease. Make sure you understand the full cost before signing the dotted line.
3. Staffing Your Business
Many businesses need to hire individuals to handle certain tasks and interact with customers. The number of people you need and the type of people you need is up to you. Thankfully, you have options for staffing:
- Freelancers: Modern technology has made it possible to connect and work with people around the world. Check out freelance marketplaces, like Upwork and Fiverr, to see if you can hire people who can help your business. The benefit is that you pay per-assignment—there’s no ongoing obligation.
- Contractors: Contractors are almost like full-time employees. There are key legal differences that make working with contractors easier. For example, you don’t have to withhold taxes when paying contractors. Typically, contracted employees don’t get benefits like health insurance, which saves you money. You also have more flexibility with hiring because contractors are only used for a certain period of time. But there are some downsides, like less control over their availability and work hours.
- Part-Time/Full-Time Employees: This is what most of us are familiar with. You interview prospective hires, offer them a job, and then you pay them regularly. You have more control over their work hours, the work that they do, and how long they work for you. You’ll have to pay more taxes on these employees, so they’re a bit more expensive to hire.
- Partners: In some cases, you may find someone who offers unique knowledge or an important skill set. It might make sense to bring this person in as an equity partner rather than as an employee. This would mean you give them a small percentage of your business or profits.
Most businesses will need employees, and payroll usually takes up a big chunk of your budget. If you’re starting your business out with a modest cash reserve, freelancers or contractors are probably the best employees for you. If you’re going to need additional help for your business, full-time employees or a partner can help significantly. Just remember that they will cost you a bit more.
For the example, let’s say you use part-time employees in your landscaping business since you’ll only need them to work 20 hours a week. Since you need to control the hours they work and what they will be doing at the properties, part-time is better than a contractor.
4. Stocking Your Business
If you’re going to sell a product, you’ll need inventory. Many small businesses struggle with the ideal amount of inventory because you’re unsure of your market. You don’t want to sell out of products, but having too much inventory can be a problem, too.
Even if you don’t need specific equipment or goods, you’ll still need basic office supplies. Things like a computer, printer, printing paper, pens, envelopes, stamps, etc. will be helpful. You may also need digital products like WordPress templates for building a website, web hosting tools, email marketing tools, or others. LAC Group, which helps companies manage their expenses, found that most small businesses spent around $200 annually per employee on office supplies. But if your business is going to print a lot (like a law firm) then the cost went up to $1,000 annually per employee.
Your costs will vary widely depending on what it is that you do. In landscaping, office supplies won’t be much of a cost at all. But, you will need some expensive equipment. To buy the equipment necessary and have a cash reserve with two or three months of payroll, starting off with $10,000 should be good.
5. Building Your Business
The last expense to consider is marketing expenses. Marketing expenses are essential because they keep your customers coming. Keep a close eye on them and know your ROI, or return on investment, to make sure you’re getting the most out of each dollar you spend.
You’ll definitely want to set additional money aside for marketing costs. A great way to start out is to get your logo designed. Once you have that, it’s time to get your business cards done. You’ll want to hand these out a lot—so make sure to get more than you think. Another marketing cost could be to print some signage. This can be things like car decals and window clings.
Once you’ve got your important marketing materials, make your free Yelp listing. This will get your name out to more people, and it legitimizes your business. Knowing where your customers are looking for similar businesses is important. You want to be found on the sites that they are looking at.
For our example, we’ll definitely want business cards, yard signs, and truck decals for our landscaping business. Then we can set up our business listing on Yelp in the Phoenix area because that’s where a lot of people look for landscaping services in Arizona.
Keep in mind you’ll also need a cash reserve to start your business. The size really depends on the nature of your business. If you need to buy inventory, make payroll, and pay monthly bills, plan for a larger reserve. If you’re selling a service and you’re a one-man shop, you’ll be able to get by with a smaller reserve.
Real Life Example: Landscaping Business in Arizona
Let’s take our example and put some numbers on paper. Here’s what you can expect to pay in each of the five categories:
- Establishing Your Business: The cost of filing an LLC in Arizona is $50 with no ongoing expense. We’ll also need the business license of $168.
- Housing Your Business: Landscaping work takes place at clients’ homes, so you can start without office space. This is a net gain, as you can now deduct a part of your mortgage or rent, as well as monthly utilities, from your taxes.
- Staffing Your Business: You’ll likely need some help. Minimum wage in Arizona is $10.50 an hour, but you may need to pay more to secure workers with the skills you need. For the example, let’s say you hire two minimum wage workers part time. At 20 hours a week, you’ll pay two workers $420 per week.
- Stocking Your Business: You’ll need the right equipment to start your business, too. This is where your cash reserve comes in handy. Start with around $10,000 cash so that you can buy the necessary equipment and fund a cash reserve for your business with the rest.
- Building Your Business: Start small with your marketing. You’ll need a website, but you can find an online freelancer to set up a simple web presence for $1,000. Opt for digital marketing, like Yelp ads to promote your company when someone searches “landscaping service in Phoenix.” Set aside $500 to help build your client base.
When you add it all up, that’s $11,718. This should give you enough to start your business and have a cash reserve to pay your two employees. Need financing? You can shop around for business loans or business lines of credit at traditional banks. There are even specific online lenders, like Lending Tree and Kabbage, that work with small businesses.
Another helpful idea as you count the cost of starting a business—writing a business plan. Getting things down on paper will help you better organize your thoughts and more effectively prioritize investments needed during the startup phase.
If you stick to the five categories and purchase the essentials, you’re off to a safe start. The upfront cost of starting a business can seem like a pretty big hurdle. But getting your business up and running is priceless!