6 tips for estimating your startup costs

Two of the leading barriers to starting a business are figuring out how much it’s going to cost to start the business, and then coming up with the money.

I can’t help you get the money, but I can offer five guidelines to help you determine how much you’re going to need to start your business.

1. Determine all of your likely expenses.   Every business is different, but most startups will have several similar categories of business expenses. Don't overlook the possibility of having initial expenses that can include:
   
   • Setup and organizational costs. This includes establishing your legal structure, consulting with lawyers and tax pros, filing necessary state and federal paperwork, and so on.
   • Office or retail rent. Startups often have to start paying rent on space before they are actually ready to open their business.
   • Equipment, furniture, and office supplies.
   • Technology needs, including Web site development and maintenance, business software, computers, and mobile devices such as Smartphones.
   • Business liability and property insurance.
   • Employee wages and benefits.
   • Buying what you’ll sell. If you’re selling a product, what is it going to cost you to buy or produce it? You’ll have to plan on having inventory with an up-front cost that gets deducted as an expense only when you sell it.
2. Develop your plan; then change it.   Most business startup advice says that you need a business plan. And you do. But that's not the beginning and end of figuring out your startup costs.

   Instead of writing a business plan and then following it in lockstep, you’re more likely to write a business plan and then rewrite it continually as you gather new information and adjust assumptions and projections. That’s OK. A business plan is a living, changing thing. It doesn’t have to be, nor should it be, set in stone.

3. Don’t under-price your offerings.   Small businesses often think they have to compete on price by being the low bidder for whatever product or service they are providing. That’s a tactic that can cost you a lot when starting out.

   "It’s a mistake to under-price your product," says Jackie Babicky-Peterson, a Portland, Ore., consultant specializing in helping startup businesses grow and develop. "Most small businesses not only cannot compete on price with larger businesses, they should not try to compete on price. They need to take advantage of their strengths as small specialized players, especially since they probably won’t have the economies of scale of larger competitors."

4. Examine potential cash-flow issues.   Initial cash flow is a problem for most new businesses. You’re going to be spending money up-front before you have any money coming in. Ideally, you should have enough money in reserve to pay for at least the first few months of business expenses.
5. Get real about the cost of money.   You may be able to self-finance your venture out of your own savings, but that doesn’t mean the money you’re investing isn’t costing you anything. Your personal investment has a value that could be earning you money elsewhere, if it wasn’t going into your business. Factor that opportunity cost into your startup costs.

   Many startups finance themselves off of home-equity loans or by tapping low-cost personal credit cards. However, whether you are self-financing or getting an outside loan, you should calculate how much that capital investment is costing you. In fact, if you are lending money to your business, you should factor in a market rate of interest for the loan. The business can pay you an appropriate rate of interest for the loan until the business’s own cash flow allows the loan to be paid off. (Note: This process isn’t necessary if you are filing a Schedule C on your personal tax return as an unincorporated sole proprietor.)

6. Don’t forget the regulators.   Part of estimating your startup costs involves predicting how long it’s going to take third parties such as local-government licensors or agencies to sign off on letting you open your doors.

   This often isn’t an issue for the solo consultant working out of his or her home. But if you’re opening a retail shop or a manufacturing facility, the zoning, safety, and inspections requirements imposed by local agencies can easily add months to your opening-day timeline.

   Because of that, one of the first places a prospective business owner should head to is your local-government planning or licensing department. If you’re contemplating any kind of building construction, modification, or build-out, look for a contractor that knows its way around the local permitting and approval processes.

About the author   Joseph Anthony is a business-finance writer who has a tax practice in Portland, Ore., specializing in tax preparation and planning for individuals and small businesses. As an Enrolled Agent, he also represents taxpayers in their dealings with the Internal Revenue Service, and regularly speaks on current tax topics and controversies.