Last Updated on March 12, 2024 by Nasir Hanif
You want to launch your business. But without knowing the startup cost of your business, you’ll not be able to figure out if you’re in a position to start it in the first place.
Even if you’re looking for funding for your business, it’s absolutely critical that you understand the startup cost. Investors would want to know every little detail about the cost of starting your business and then sustaining it.
There are numerous factors that can affect the overall startup cost of your business. It’s important to understand these factors so that you can estimate your startup costs well.
But before we take a look at them, let’s first understand what exactly are startup costs and why they’re so important.
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Startup Costs and Their Importance
In a nutshell, the startup costs of a business are those expenses that you’d incur while establishing a new business. Essentially, all of these costs occur before your business is formally established and running.
As the business formation process is a one-time process, most of the startup costs are non-recurring ones. You could also call them pre-opening expenses.
Some of the reasons why you should calculate these startup costs are
Finding Investors:
Providing an accurate breakdown of your startup cost can go a long way in helping you get investors on board. It helps build their confidence in your business.
Correct Estimations:
Whether you’re budgeting your expenses or building a feasibility report, having a solid breakdown of your startup costs can help you understand your expenses better.
Helps with Tax Deductions:
Some startup costs might be eligible for tax deductions and may reduce your tax liability. It’s thus important to identify these costs correctly.
Set Realistic Goals:
When you know the exact costs that are going into starting your business, you’ll be better placed to set more realistic goals for your business.
Now that you know about the importance of startup costs and how they are important for your business, let’s take a look at the various costs you’ll incur.
Types of Startup Costs You Need to Consider
Here are the different types of startup costs that you’ll need to consider when you’re starting a new business.
1. Fixed Costs
When you’re starting a business, there will be several costs that you’ll incur as one-time expenses. These expenses are essential for starting the business legally and there’s no way of avoiding them.
Some of the fixed costs associated with starting a business are:
- License fees
- Registration fees
- Permit fees
- Website design and development
- Logo designing
- Rental property/Property purchase down payment
- Business card printing
These are just some of the fixed costs that you might incur. Based on the nature and type of business you choose to start, the costs may be high or low too.
Additionally, the business structure you choose will also affect the various fixed costs that you will have to pay.
2. Asset Costs
Along with the fixed costs related to establishing your startup business, there are some costs that you’ll incur for buying assets.
Even the most basic business with a limited budget would require a few assets to get started. Some of the assets that you might need to purchase are:
- Laptops/Computer equipment
- Office furniture
- Vehicles
- Basic inventory
- Tech equipment
- Other office equipment
3. Advisory Costs
Starting a business is no mean deal. There’s loads to be done, including finding funding for your business, legally registering it, and so on.
It’s practically impossible for a single person or team to do it all without any external assistance. That’s where advisory costs come into the picture.
You might have to engage the services of third-party businesses to form your LLC, help you with legal matters, or even find funding.
You might even have to engage the services of an accountant to help with financial projections, reviewing your bookkeeping, and more.
4. Cost of MVP (Minimum Viable Product)
Before you can start a business, you’d need a product or service that you can launch in the market.
Now, it can be easy to miss out on the cost of developing this product or service as it may take place even before the business idea pops into your head.
That’s why it’s important to consider the cost of creating a MVP as a part of your startup costs too.
This is the cost that you incur in developing your first working prototype or product. While it may go through several iterations at a later stage, this is an initial cost that you must consider.
The cost of an MVP is even more important as it can serve as a base for determining the production cost. Faulty figures here could lead to poor calculations for production costs.
5. Human Capital Costs
One of the most important startup costs that you will incur would be human capital costs. Without employees, you can’t expect your business to reach the heights that you’d want it to.
You might be skilled enough to handle multiple tasks, but it always helps to have a helping hand. This would, of course, come as a cost to your business.
These human capital costs can be incurred even if you haven’t hired employees. You might engage the services of freelancers for certain tasks. Their fees are a part of human capital costs as well.
Even if you don’t hire anyone, your business would still have to pay you for your work. This, too, would count towards human capital costs.
Final Thoughts
Starting a business comes with its own set of challenges and startup costs. It’s important to identify these costs as they can help you find funding, set correct estimates, sort out your taxation, and more.
Some of the startup costs you’ll incur include fixed costs and asset costs. You might also have to pay advisory fees to third parties.
In addition, you’d have to incur the cost of MVP. Finally, you’ll have to pay fees to your employees and freelancers. This would count towards your human capital costs when you’re starting out.
Do you have any questions about startup costs? Ask them in the comments.
Read more: 5 Essential Tips to Consider When Budgeting for a Household Move
Author Bio:
Brett Shapiro is a co-owner of GovDocFiling. He had an entrepreneurial spirit since he was young. He started GovDocFiling, a simple resource center that takes care of the mundane, yet critical, formation documentation for any new business entity.
