Calculate Your Startup Costs

A well-reasoned snapshot of your startup costs will ensure that you stay on budget and hit your key milestones on the long road ahead. If you don’t plan accurately, you run the risk of running out of cash when hit with unforeseen circumstances — which is quite often in entrepreneurship.

Peek at similar companies’ statements

When faced with a litany of financial information, it can be daunting to put together your cost plan. A good tip is to look at the financial statements of publically-traded companies in your industry, preferably with similar products or services. Although there won’t be startup costs, you will get a general idea of what they spend their money on. Although bear in mind that larger firms have economies of scale — cost advantages.

Seek advice from industry associations

 Another good idea is to talk to industry associations and business people. A wide array of websites are available, with forums and discussion boards where you can learn from other entrepreneurs’ experiences, ask questions and even get mentorship.

How to calculate your startup costs

Start with fixed and variable costs such as your spending on assets—those physical or virtual things that are essential to you running your company. They can be as simple as office space and the desks, chairs and computers that invariably come with them, or website hosting and other software costs. If you’re selling products, there will be fixed manufacturing and distribution costs to consider. Examples range from raw materials to gas and renting production facilities. If you’re selling services, as many online businesses do, inventory will be less of a concern.

For each item on your list of assets, you should write down how much it will cost you. If you’re not sure, make an educated guess and try to verify that by doing some research — Google is a wonderful tool, or you could call up an estate agency to inquire about the cost of renting an office or production area, for example. Here are a few more examples to get you going:

  • Market research
  • Advertising
  • Insurance
  • Licenses and permits
  • Utilities
  • Communications

Calculate your expenses

Next come the expenses, which can be confusing, as some expenses could be considered an asset, such as computers. But by including them as expenses, you can deduct them from your annual tax return — essentially saving you money. An accountant or bookkeeper should be able to help you to do that. Some expenses are more obvious. For instance, the money you spend building and developing your online firm’s website and paying staff salaries and bonuses.

Add up to get your “startup cost”

Once you’ve added up assets and starting expenses, you will be able to calculate your total “startup cost”. This figure is the total amount you’ll need in your bank account to get through the first phase of starting your business, before you begin tapping investors for growth or seed capital. It’s important that you have this money ready before launch because while your startup is establishing itself you will likely not generate enough revenue to cover your costs and expenses, let alone turn a profit.

A good idea is to aim to have enough capital for six to 12 months of expenses. Or a more sophisticated method is to forecast your first 12 months of sales, as well as the asset costs and expenses associated with making those sales, and use that as your starting block. Once you have a list of 12 months, you can subtract the costs and expenses from the sales each month; the resulting number will show you whether you have enough money to continue as a going concern. You will also be able to tell how many months it will take you to break even.

Work out your funding goal

With that data, you should also work out your funding goal. You may wish to have a cushion, so that you have some money set aside for extenuating circumstances, or a dearth of cash flow — a common problem for startups. That’s why it’s not advisable to create a longer plan, are there will be many surprises as you launch and grow your online business. If you start with a reasonable estimate of your projected costs, you’ll be better prepared to write your business plan.

Once you have worked our your startup cost, you will be able to figure out whether you need to consider getting external funding. Calculate your burn date (the amount of money you will spend each month). If you will need to raise money to cover your monthly costs, consider seeking financial help.