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Calculating Startup Costs Before Setting Up A Business - Startup & New Business Costs
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A common mistake many first-time business owners make is underestimating the amount needed to start their new business. In fact, this unintentional miscalculation is one of the leading reasons why most businesses tend to fail in the first year of operation. Even though there is never a guaranteed way of knowing a new business will make a substantial amount of profit or that it will “break-even,” entrepreneurs still need to properly calculate the different costs before further investing their time and effort into the startup. Entrepreneurship can be a very costly venture, and many first-time business owners need to properly assess the many different challenges that lie ahead, especially when it comes to estimating the startup costs.

For more information regarding why most businesses fail, please refer to Why Most Businesses Fail

Research estimated costs
One way entrepreneurs can avoid the underestimation of new business costs is by doing independent research. By simply taking the time out to research the various anticipated expenses for a new company, business owners will be able to educate themselves about the industry, any leading competitors, and how much will be needed to launch and sustain their startup. They also need to analyze the performance of similar products in the market and determine different ways in which the product can improve. Research can be conducted through visiting online entrepreneur sites and by reading small business and startup books. In addition, entrepreneurs can also speak to other business owners who have experience and success in the same field. If an entrepreneur does not have the time to conduct independent research, they are able to hire a professional who can do the research for them. For an average cost of $50 to $75 per hour ($5,000 minimum), many business owners can conveniently obtain any needed marketing information for their new business.

Product development and commercialization
One very important component to consider when starting a new business is the process of new product development and the amount of money it takes to effectively create a product. Many entrepreneurs will agree this development process not only takes time and effort to execute but it can also be financially draining. During a new product’s development, an idea can be generated rather quickly. However, it is the concept development and testing phase that may take a considerable amount of time to complete. In this particular phase, entrepreneurs will be faced with the cost of producing their product. They may also need to invest additional funding into the product’s test marketing and technical implementation phase, which may require more specialized revisions before their product can be commercialized.

For more information regarding product and market testing, refer to New Business Marketing Strategies

Website and technology expenses
Every new business should have an updated, well-detailed website that proudly introduces their company and its different products and services. Their website should be user-friendly and designed and maintained by skilled technical professionals. A company’s website development and maintenance is a necessary cost, especially if the company is interested in making additional revenue outside of the traditional in-store purchases. In addition, business owners need to consider other technological expenses, including computers and accessories with updated specialized software for their company. Website and technological expenses are essential in today’s innovative and technologically-adept society.

Office expenses
Another cost to consider when starting a business is office expense. This financial figure can encompass the combined amount of renting (or buying) office space, office furniture, telephone and fax lines, high-speed internet access, office supplies, etc. It can also include licensure costs, down payments and surcharges, office utility bills, inventory, maintenance, and company-related miscellaneous expenses. Many entrepreneurs do not realize how important this expense can be in order to properly sustain a business, and that is the reason why this cost is most often overlooked.

Marketing and advertising costs
Every new business should also be aware that in order to gain public recognition and paying customers, they will need to spend money on promoting their company and its products and services. Marketing materials can include anything from professional business cards and stationery; local, nationwide, and international advertising campaigns; online and in-store promotional offers; public relations, company flyers and brochures; internet and telephone marketing, etc. Depending on the type of industry and the aggressiveness of a company’s public relations approach, this process can be very expensive.

Basic living salary for business founders
Business owners need to calculate how much their exclusive salary should be during the initial years of startup development. Even though most entrepreneurs may choose a modest salary, they should take into consideration the cost of living, including rent or mortgage payments, car and gas expenses, food, clothing, and other personal costs that are needed to sustain themselves and their families for about one year. A founder’s living expense can certainly cost less than their overall startup business costs; however, its significance should be taken into account since most new businesses will not reflect any profit for at least one year.

Other employee payroll and benefits
When starting a new business, entrepreneurs should take into account the salaries and benefits of their employees. First, they should consider if they will be the sole operator of their business or if employees will work for them. If their business will encompass the assistance of paid staff members, then the business owner needs to determine the hierarchy of workers and the number of full-time and part-time staff so their salaries can be adjusted. In addition, they can also determine who will be qualified for receiving health insurance and other employee-related benefits. Employee payroll and benefits are just two of the many different costs needed for a startup.

Monthly insurance costs
Another very important expense to keep in mind is the monthly cost of small business insurance. Every new business needs different kinds of insurance in order to protect their company, personal assets, and paid employees. For many business owners, the type of insurance they choose is highly dependent on the nature of their business. For example, liability insurance can protect a business’ property, while worker’s compensation insurance abides by state-specific rules when enforced. In addition, if a new company has a great deal of assets, they may be inclined to purchase property damage or theft insurance. In addition, company owners and board members may even consider getting life insurance to protect themselves and their families as well as legal service insurance which will cover any legal or professional fees.

Legal and professional fees
During the pre-startup phase and throughout a company’s progress, an entrepreneur will work with many collaborators (including attorneys, accountants, investors, writers, advisors, etc.) in ensuring the successful launch and development of their company. Many of the fees these professionals charge do not come at a low cost. In fact, they are rather expensive to hire and sustain. For example, many attorneys can charge anywhere from a few thousand dollars to tens of thousands of dollars just for lease negotiations, patent, trademark and logo planning, and non-disclosure agreements. Accountants, on the other hand, can also charge just as much, especially since they are needed for financial guidance and company tax purposes. Entrepreneurs should never underestimate the need for these hired professionals since they are the only ones who can provide the necessary guidance to an entrepreneur during the very stressful time of starting a business.

To learn more about the importance of an attorney for an angel investment, please refer to Angel Investment

Travel expenses
Every company should consider travel expenses in their startup costs. These expenses will usually cover any business-related training outside of the company’s center of operations. They can include any educational or technical workshops, seminars, or training for employees and founders. Depending on the number of employees, a company’s travel expenses may be equally as important as other company expenditures.

Conclusion
The predicted costs for starting a company is often underestimated. An entrepreneur needs to properly evaluate all the associated expenses that need to be paid prior to the launch of their new company. Once they are able to consider the different financial costs, these estimated values should be well-documented in their company’s business plan. Failure to properly record all financial projections can easily cost a business owner from obtaining the necessary capital from institutional lenders and potential investors.

In addition, many business owners apply the “break-even” analysis of marketing. This is a term that refers to the amount of revenue an entrepreneur needs to receive in order to cover all company expenses before making any personal profit. This predicted calculation can closely estimate the potential profitability of a product. Many experienced entrepreneurs widely use this analysis as a primary screening tool for any new business ventures. It is a proven fact that entrepreneurs who are able to successfully “break-even” shortly after the launch of their new business or product have a greater chance of achieving company success when compared to those who did not “break-even.” The “break-even” theory closely estimates the viability of a new business venture and is a theory all business owners should apply.

Once all fundamental costs are carefully measured and well-thought out, the entrepreneur can then find different sources of funding for their new business. If considering different sources other than personal financing, they should then attempt to convince a business investor their product, indeed, shows promise of making a substantial amount of profit.

For more information about other sources of financing, please refer to The ABC's of Funding

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