Topic overview

Start up costs

A young, female entrepreneur is calculating her start up costs

One of the most critical pre-start up tasks is working out how much money you need to launch your business. Only then can you think about how you're going to raise it.

Providing it doesn't hamper your ability to operate effectively, you should keep your start-up costs to a minimum. The less you spend, the less you'll have to turnover to breakeven. minimising spending also makes it more likely that you'll be able to afford any unexpected costs. Also, it's a good discipline to establish good spending habits and stick to them. Saddle yourself with too much debt early on and you will increase your chances of failure.

Keeping your costs down

Not everyone can start up on a shoestring, but make sure there's a legitimate business reason for everything you buy. Being creative and willing to compromise can help keep your start-up costs down. Premises are the biggest expense for many businesses, which is why so many new ventures are started from the owner's home. Just make sure that you have dedicated space, maybe a spare room, garage or even garden shed. If you need to meet people, you can do this in a coffee shop. Serviced offices are a popular and relatively cheap option and you don't generally have to sign up for long terms.

Instead of buying goods and services, consider whether you can trade with other businesses. Another option is borrowing. If you can't borrow, you might be able to lease or buy second-hand. If you must buy, search for value-for-money suppliers and negotiate hard. You could ask for credit – but don't be surprised if you don't get it. You might even have to pay upfront or on delivery.

Avoid wasting money

Low or zero-cost advertising and marketing, such as audience building on social media, word of mouth or even a card in a newsagent's window, might be more effective than an expensive direct mail or advertising campaign.

Renting expensive premises is another common mistake. And unless you start a business that genuinely relies on its image, don't pay a fortune for a new logo or an all-singing, all-dancing website - keep them ultra-simple. Every penny you spend must earn money for your business otherwise you're wasting money.

Using a home-based computer or tablet can save you a lot of money on many business tasks, from producing stationery and building your own website to doing your own simple accounts. Another alternative is to purchase secondhand or refurbished computers and accessories. They are often much cheaper and usually carry a warranty in case of problems. eBay, local auctioneers, charity shops, newspaper and trade publication classifieds are good places to look. Often when firms move to better premises they’ll sell off or even give away old furniture and office equipment. Many companies also sell refurbished products such as computers and accessories, office furniture and tools.

Calculating start-up costs

You must take into account all your start-up and operating costs for at least 12 months ahead. Relatively small expenses can mount up, while neglecting to include some in your costs will mean you're simply storing up some nasty surprises for later.

Your start-up costs could include power tools and equipment and installation, a vehicle, road tax and company car or van insurance, premises, fixtures and fittings, initial stock or materials, launch marketing and advertising items, legal and professional fees, possibly a licence, maybe staff uniforms, etc.

Premises-related costs can provide a shock for less-experienced business people. First you have to find premises, possibly refit and redecorate them, maybe make them safe, secure or legally compliant.

If you decide to rent, a landlord will expect a deposit and rent upfront. You might also have to pay a service charge.

All of these elements need to be included in your cost calculations.

Working out your overheads

Calculate your total overheads (also called 'fixed costs') on a monthly basis spanning your first year of trading. As well as rent or commercial mortgage repayments, overheads include rates, business insurance, utility and communication bills, professional fees, etc. You might also have to pay connection fees for some overheads.

Employing people is costly. As well as wages, tax and National Insurance and pension contributions, you might have to pay to advertise jobs, possibly for training, too. You must build in your own wages to your costs, and be sure you'll be able to earn enough – or else find another way to cover your living expenses

Once you have worked out your start-up costs, compare them against your sales forecasts. If your costs exceed expected revenue, you need to find ways to sell more, reduce costs or else find a viable business idea. If you can't afford to fund the launch of your business, you at least know how much funding you require.

It can take time for a new business to begin making regular sales, let alone turn a healthy profit. You need to bear this in mind when estimating how much finance you need to keep your business afloat for that all-important first year.

Use accounting software to keep track of your actual costs. Many small business accounting packages can also help you prepare budgets and compare your costs (and income) against forecasts. This can provide an early warning if cash flow is less healthy than expected, giving you more time to think about what you can change and whether you need to find additional financing.

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