Working out how much it costs to start a business is one of the first steps you’ll take when bringing your business ideas to life.
In this guide, you’ll learn about common business startup costs and how to estimate how much you need to set aside to get started.
What are business startup costs?
Business startup costs are expenses you incur before your business starts generating income.
Why is it important to calculate business startup costs?
Calculating business startup costs is important to ensure your idea is viable and to set yourself up for success. According to Statistics NZ, just 37% of startup businesses survive past their first two years, with many failing due to cash flow problems. It’s vital to know how much cash you need for your first 6-12 months of trading to avoid falling into the same trap.
By calculating your expected startup costs, you may be able to identify cash shortages before you start. You can then look into financing options to cover any shortfalls.
Having a clear idea of your startup and running costs will also inform how you price your products and services, so you get your profit margins right.
Common business startup expenses
Common business startup expenses vary from business to business. The following examples apply to most companies, so make sure you take these into account when estimating your costs:
Research and business planning
Research and business planning are sometimes overlooked steps in the startup process. But without a detailed business plan based on current market data, you risk either overestimating your net profit or underestimating your business expenses. Both of these scenarios can mean disaster for your fledgling business.
If you’re starting a business on a shoestring budget, you might do your own market research and write your business plan yourself. This can work well for many business owners. However, if you have the budget, hiring business advisors or market research firms may give you the best start possible.
Business branding and logo
Getting your business branding and logo sorted is an important step when starting your business. You’ll need this designed before doing other tasks like getting product packaging made, setting up your website and creating marketing materials.
Business registration fees
Business registration fees are startup costs that, in many cases, are required by law. Bear in mind that you may also need to apply for industry-specific licences.
Equipment and supplies
The equipment and supplies you need to start your business must be included in your startup costs. If you’re starting an online service business, this might be as little as a laptop and some stationery. If you’re selling products, you need to calculate the cost of the raw materials and any manufacturing equipment you need.
If your business needs equipment like expensive tools or large machinery, weigh the benefits of buying versus leasing. There are various equipment financing options you can consider.
Website build and hosting
Website building and hosting are important costs to consider when launching a startup, especially if you’re starting an online business. Web design and development rates vary greatly between providers, so get a few quotes before deciding who to go with.
If you’re selling products online, integrating e-commerce software with your accounting software will help streamline your processes. This will give you back time to focus on sales.
Tip: MYOB Business integrates seamlessly with Amaka, which allows you to automate your e-commerce sales data entry across Shopify, BigCommerce, eBay, Square and more.
Legal expenses
Legal expenses for your startup business include product patents and brand trademarks. Intellectual property protections can be expensive, so consider consulting a legal advisor before applying to check if it’s worth the cost and effort.
You should also ensure your new business’s legal documentation is airtight, including terms of trade, refund policies and employment contracts. It’s good practice to seek legal advice for these documents to protect your business.
Common business operating expenses
Business operating expenses are the day-to-day costs of running your business.
You should calculate your new business’s expected operating expenses before you start. However, categorise these estimated running expenses separately from your projected startup costs.
We’ve listed the eight most common business operating expenses for you below:
Business insurance
Business insurance is important for protecting your business from risks like damage to your property, legal liabilities and lost income. Some insurances, such as public liability insurance, are compulsory for many industries. Make sure you’ve considered this when calculating your running costs.
Insurance can be a bit of a minefield, so read our guide to deciding what insurance you need for your business if you need a hand.
Borrowing costs
Borrowing costs will be a regular business expense if you’ve had external financial help to start or grow your business. Some types of business financing you might seek for your startup include peer-to-peer lending, business loans or equity financing.
When calculating your ongoing business costs, include any loan or debt repayments – don’t forget to include interest. Missed loan payments can have severe consequences for new businesses, so plan them carefully and always pay them on time.
Rental and utilities
Rental and utilities should be included in your calculations for startup and ongoing costs for your new business. If you need office space or warehouse space, for example, you’ll have lease payments. You may also need to pay a deposit upfront and for a commercial fit-out.
Your utilities include any bills associated with your business space, such as water, gas, electricity, internet and phone lines.
Payroll costs
Payroll costs include employee wages, salaries, benefits and mandatory insurance. If you plan to hire employees, your payroll will cover a large portion of your overhead costs. Don’t forget to include these when calculating your running costs.
Consider using cloud payroll software to make payroll management more manageable, saving time and money in the long run.
Tip: MYOB Business includes payroll software to run the numbers each time you pay your employees. With MYOB, you can be assured your payroll is always correct and meets all compliance and reporting requirements.
Inventory costs
Inventory costs include ordering, carrying, shortage and spoilage costs. Before you get your business up and running, you need to estimate how much it’ll cost to order and store your inventory.
Once your products start to sell, you might find inventory management software useful for taking control of your stock and minimising your inventory costs.
Tip: MYOB Business includes in-built inventory management software. Track inventory, automate re-ordering and generate reports to see what’s selling and what’s not. Say goodbye to pen-and-paper processes and gain the insights you need to keep your inventory costs low.
Marketing and advertising costs
Marketing and advertising costs are important expenses for selling your product or service to your target customers. Marketing and advertising can include anything from local newspaper ads to social media ad campaigns, which incur expenses.
When you’re ready to start your new business, create a marketing plan and ensure you’ve included any potential advertising costs in your business budget.
Vehicle expenses
Vehicle expenses include fuel, maintenance, insurance and road user charges. If you plan to purchase or lease one or more vehicles for your business, consider these costs.
General office expenses
General office expenses cover all the bits and pieces you need to run your business daily. This includes frequent, low-cost expenses like postage and stationery and less frequent, big-ticket purchases like computer equipment and office furniture.
How to calculate business startup costs
Knowing how to calculate business startup costs will save you major headaches. Here are four steps you can take to work out your new business’s startup costs:
Research your industry
Research your industry to see what expenses businesses like yours have. Find out roughly how much your competitors spend on staffing, marketing and inventory storage, for example. This will give you a great foundation to calculate your business’s startup costs.
Formulate a business plan
Formulate a business plan to get your vision, goals and strategies clearly defined and in writing. Your plan should include an overview of the business, details of your products or services and a clear financial plan. Writing a business plan helps you define your goals and plan how to achieve them.
If you need funding, you’ll need a well-written business plan to show banks and investors why they should buy into your business.
Estimate all expected expenses
Estimate all expected expenses for your new business. Use your market research to give you an idea of what expenses to include, but remember to consider costs specific to your location and business. These costs may include rates payable and industry-specific licences.
Some expenses will be fixed and easy to include in your calculations, like business name registration and licences. You may have to estimate others like manufacturing materials and rent costs. When estimating expenses, it’s always better to overestimate than to underestimate. Underestimating your costs can quickly lead to cash flow problems.
Separate startup and ongoing costs
Separate the costs you’ll pay for starting and running your business. This will help you know how much money you’ll need to put into your business before you start making money.
Businesses can take a while to become profitable, so it’s a good idea to have enough funds to cover running costs for at least six months before you start.
Tip: Use accounting software like MYOB Business from day one to establish excellent bookkeeping and accounting practices right away. You’ll also have financial reporting and budgets on hand to help you make smarter decisions about your business as you grow.
Get handy insights into your tax, cash flow and finances. Create budgets, track your expenses and set spending limits so you have the financial control and insights you need.
Business startup costs FAQs
How much money do you need to start a business?
How much money you need to start a business will depend on your circumstances, including your industry, goals and location. A good target for most business owners is to have enough capital before launching to cover startup costs plus running costs for at least six months.
Can a business be started with $1,000?
Yes, a business can be started with $1,000 – whether that business will succeed is a different question. With such limited startup funds, you’d struggle to do much marketing or advertising, so it’d take even longer for your business to become profitable.
Many small businesses fail within their first year due to cash flow problems. Set yourself up for success by having enough funds to cover operating costs (and your living expenses) for the first six months before you launch.
What are the cheapest types of businesses to start?
The cheapest types of businesses to start are those you can perform from home with a laptop, internet connection and business management software.
Give yourself a head start and set your business up for success
If you’re thinking about entering the exciting world of entrepreneurship, then preparation is key. Give yourself the best chance for success by calculating your startup and running costs, planning for potential challenges and clarifying your goals before diving in.
Keep track of your fledgling business finances from day one with easy-to-use business management software. MYOB Business lets you track your income and expenses on the go so you always know what your business is doing as it grows. Then use the forecasting smarts to set goals to accelerate your progress. You can also manage your payroll, inventory and sales with MYOB. Get started today.
Disclaimer: Information provided in this article is of a general nature and does not consider your personal situation. It does not constitute legal, financial, or other professional advice and should not be relied upon as a statement of law, policy or advice. You should consider whether this information is appropriate to your needs and, if necessary, seek independent advice. This information is only accurate at the time of publication. Although every effort has been made to verify the accuracy of the information contained on this webpage, MYOB disclaims, to the extent permitted by law, all liability for the information contained on this webpage or any loss or damage suffered by any person directly or indirectly through relying on this information.