## Calculating Startup Costs

##### Introduction

Once you have developed a business idea and are ready to start a business, the next question is “how much money do I need to get started?”. This question is not as simple as it sounds to answer. Every industry and every business have unique cost requirements and expenses. Some industries require specific licensing, while others require particular certification assessments. Calculating the startup costs of a business requires planning and research to ensure you include all necessary expenses relevant to your line of business.

##### Step 1: Define Cost Structure

• Real estate expenses
• Sales expenses
• Professional fees
• Technology costs
• Sales and marketing costs
• Wages and benefits
• Inventory costs
• Working capital expense

Put some thought into what percentage of your funds will be allocated to each category. For example, a software consulting company will spend a significant chunk of its startup funds to buy software under the technology costs category, while a hair salon will spend a large amount of startup money on renting/buying a location under the real estate expenses category and paying wages for beauticians under the wages and benefits category. This activity will help you define the individual costs for each cost category.  Remember that defining your individual cost line items within your cost structure will be a continuous activity as you progress through the next four steps.

##### Step 2: Conduct Research

After you define your basic cost structure, the next step is to conduct industry research for comparables. Most likely, you are not the first business to enter this industry. Use similar businesses to estimate your individual costs, for example, the percentage spent on office furniture versus employee wages. Remember to use companies in the same physical location and of the same size for an accurate estimate. Many times, large companies are able to get economies of scale due to their large volumes, so they may spend less on materials per product than your initial startup company in the same industry. However, you can still use these numbers as a goal to aim for in the future.

##### Step 3: Be Conservative

The next step is to account for the unknown by being conservative. You should estimate cost projections conservatively in order to ensure your business can handle some bumps during the initial startup. Plan for the business to take some time before it is self-sustaining and profitable. A good rule of thumb is to add a 20% contingency to your startup costs. The contingency allows you a cushion for handling unforeseen items once you start your business.

##### Step 4: Account for Recurring Costs

It is vital that you account for recurring costs versus one-time costs when calculating startup costs for your business. Recurring costs happen month-after-month or year-after-year, such as rent, business insurance, and telephone service. On the other hand, one-time costs happen once, such as office furniture, office decor, and computer equipment. By understanding your fixed recurring costs, you can provide a more accurate budget required during the startup period. In addition, these recurring costs will help you distinguish between what costs are necessary and what costs are optional. Once your business is up and running and profitable, you can always allocate funds to buy non-essential items at that time.