How to (Accurately) Estimate Business Startup Costs?

How much does it cost to start your business? Before a business actually makes money, there are a number of costs to take into consideration, and they are just as important as your sales forecast. We call them business startup costs.

Estimating carefully startup expenses is very important, as it will allow you to make better decisions down the road. Knowing how much you need to spend before you turn a profit will help you secure loans and capital from investors.

In this article we explain everything you should know about startup costs: what they are, why they’re so important and how to (accurately) estimate them for your pitch deck or your business plan.

What are startup costs?

Startup costs are by definition any type of expenses incurred by a business before it is generating revenue. These are all the bills and expenses you will need to incur before you can actually launch your product and start making sales from customers.

Business startup costs depends on the type of business model your business fall into, businesses are either:

Digital: ecommerce, mobile apps, SaaS / software, marketplaces, etc.
Service: marketing agencies, medical practices, accounting firms, legal advisory, etc.
Brick-and-mortar: retail, manufacturing, etc.

Whilst some businesses typically have high startup costs, some other businesses do not.

For example, a software SaaS business might account for personnel costs and hosting infrastructure (AWS) expenses before actually making sales. Their scale depend on the time to market: the time to develop the product.

In comparison, a retail store might need to account for physical inventory and rental costs, before it can actually start selling products. The scale of startup costs depends here on the type of products (their value) and the inventory turnaround time.

Why are business startup costs important?

Evaluating startup costs is as important as estimating future revenue. Indeed, whilst future sales have a certain degree of uncertainty, startup costs are more likely to actually happen.

In other words, you don’t want to end up in a situation where you would have underestimated the startup costs needed before you can turn out a profit, especially if you overestimated revenues…

When will your business be profitable?

Forecasting startup costs will allow you to understand your business profitability: will it turn a profit? If so, when can you expect to be profitable? How profitable will your business be?

Along with your business financial projections, estimating the startup costs allow you to establish a clear path to success. Keeping an updated budget for your startup will help you make better decisions down the road to make sure you are in track to profitability.

How much do you need to raise?

Beyond profitability, forecasting startup costs will make sure you know exactly how much you will need to raise from banks and investors.

Many entrepreneurs and founders do not really know exactly how much they need to raise. This is a common mistake which can cost you a lot as explained in our article here.

How much cash do you need to cover your losses over the next 12-18 months? The amount of money you need to raise is the result of your financial projections.

Ideally you should run different scenarios to understand how much you should raise if, for instance, growth is lower than expected, or product development is delayed by 4 months, etc.

Whilst raising too little has obvious consequences later on (you will run out of cash early and will need to raise in a difficult position, urgently), raising too much can be costly too (risk of dilution, overspending, etc.).

In any case, investors are wary of overspending and uncontrolled cash burn. Showing them you have built a credible financial model, assessed different scenarios will give them confidence money will be well spent.

How to estimate business startup costs?

Start by listing all the expenses you incur and the assets you need to buy before you can actually generate revenues.

There are 3 types of business startup costs:

One-time expenses

Any expenses you incur once before you start your business.

Do you need to pay for legal fees to incorporate your business? Any license or permits to purchase before you can market your products to consumers? What about the costs to build your website with which you will start acquiring customers later on?

Ongoing expenses

These are recurring expenses you will pay every month for a given period of time.

Often, startup ongoing costs are fixed (e.g. rent, salaries) and not variable. Variable costs (e.g. paid marketing, payment processing fees) often start when you start generating revenues.

Typical examples of ongoing startup costs are:

Salaries
Subscriptions, phone bills
Rent
Bank fees
Loan payments (if you already have debt)
Insurance payments
Utilities

Startup assets

These are costs associated with the purchase of long-term assets to start your business.

Common business startup assets are:

Starting inventory: if you need to purchase inventory to sell your products later on (retail, ecommerce)
Machinery, equipment (manufacturing)
Office equipment and furniture
Vehicles

Why should you separate startup assets vs. expenses?

When setting up your startup business costs and budget, be sure to separate assets vs. expenses.

Indeed, expenses are tax deductible: they reduce your taxable income. Assets instead do not.

By carefully separating both, you will forecast accurately the money you will have to pay, and save on corporate taxes. This is a very important step: entrepreneurs often misjudge the impact of taxes (positive or negative) down the road which can create some serious problems.

For more free resources on how to build rock-solid financial forecasts for your business, be sure to read our articles below: