Calculating your startup costs is crucial when it comes to growing your small business.
Here’s how to create a startup costs checklist, estimate your startup expenses, finance these costs and use them to claim business-tax deductions.
Typical Startup Costs for a Small Business
To calculate the expenses of growing your new company, start by creating a small business startup costs checklist. This gives you a list of categories you can use to organize your bookkeeping and your tax reporting.
A comprehensive list of expenses should include both fixed and variable costs.
Fixed costs for a startup business are expenses that don’t vary regardless of how many units of your product or service you sell. These include costs such as labor, marketing, rent and utilities.
Variable costs change depending on how many units of your product you sell. These can include the actual cost of your product, shipping fees and sales commissions.
A List of Common Expenses
Exact expense categories will vary from one business model to another, but certain expenses are typical for most companies. Common startup costs include:
- Incorporation fees: These need to be filed with your state of incorporation.
- Online business startup costs: These include fees such as domain registration, website hosting, information technology support and web design.
- Payroll: Typically the largest expense for most business models, payroll often accounts for one-quarter to one-half of your total budget.
- Employee benefits: This includes items such as insurance, workers’ compensation and unemployment.
- Pension and profit-sharing plans: For companies that use such plans.
- Commissions and fees: If companies pay workers through these methods.
- Contract labor: Applicable to companies that outsource.
- Marketing: Necessary to grow any business, marketing costs typically range from 2% to 20% of revenue for startups, with the Small Business Administration (SBA). recommending 7% to 8% for startups generating less than $5 million a year.
- Office rental: Cost varies with your business model and the number of employees.
- Mortgage: For companies that own property.
- Office furniture and supplies: The average is typically 10% of the total budget for startups.
- Utilities: This varies with office size and phone usage.
- Equipment: This category can be significant for types of businesses that rely on heavy machinery or production equipment; other companies may only require minimal office equipment.
- Depreciation and depletion: For companies with assets that lose value over time.
- Inventory: This can consume up to 20% to 25% of the total budget for companies that stock physical products.
- Shipping and logistics: This expense varies by business model, with companies that ship physical products by mail incurring significantly higher expenses.
- Travel: This varies depending on the business model, ranging from travel to and from the office to airline trips to meet with clients.
- Professional consultants: Experts such as bookkeepers, tax preparers and lawyers account for an average of $1,000 to $5,000 a year.
- Insurance: Business insurance costs for startup companies average $1,200 a year and can include items such as general liability insurance, commercial property insurance, worker compensation insurance and errors and omissions insurance.
- Taxes and licenses: These vary with business type, revenue level and tax strategy. Corporations pay a 21% tax rate and pass-through entities are eligible to claim a 20% deduction.
How Much Does It Cost to Launch a Company?
Once you have a list of expense categories, calculate the cost of starting your company. You can automate the process by creating a business startup costs spreadsheet with a program such as Microsoft Excel or an application such as QuickBooks that integrates with common spreadsheet software.
Templates for Excel business budget spreadsheets are available online. For best results, consider using a cloud-based app that allows you to integrate data from other financial software, such as payroll and inventory software, which will save you time and labor on data entry.
It saves time to have an app that automatically captures your expense reports. Expense-reporting apps such as Expensify let you use a smartphone to scan receipts and automatically enter them into your accounting system.
When setting up bookkeeping software for your business, it’s important to keep your business and personal expenses segregated. You should have a business bank account and credit card account separate from your personal accounts. This will help avoid confusion and potential financial and tax troubles.
If you want to keep track of your personal budget in the same file as your business budget, you can keep these budgets distinct by creating a separate line item or worksheet for your personal budget.
Covering Your Startup Costs
Knowing your startup costs puts you in a position to develop a winning financing strategy. By combining your expense calculations with your revenue estimates, you can prepare financial statements that project how much cash you’ll need to run your business during your first few years of operation.
Once you know how much cash you need, there are several strategies you can use to come up with the required funding:
- Invest part of your revenue in covering your expenses.
- Look for places to cut costs.
- Borrow from personal financial sources such as credit cards or loans.
- Apply for a business loan or line of credit from a bank, credit union or alternative lending source.
- Request a microloan.
- Apply for a revenue-based loan in which you repay investors with a percentage of your ongoing revenue.
- Seek a grant from a government agency or private company.
- Pitch your business plan to venture capitalists.
- Pitch your business plan to angel investors.
- Network with business incubators.
- Promote your business plan on a crowdfunding site.
- Work with a peer-to-peer lending network.
- Arrange a trade-credit agreement with suppliers who are willing to let you defer payments.
You can use these strategies individually or in combination to finance your startup.
Claiming Startup Business Deductions
Calculating your business startup costs enables you to claim tax deductions. Under Internal Revenue Service rules, most business startup and organizational costs are classified as capital expenditures, but you can opt to deduct up to $5,000 in startup costs during your first year of business, plus up to $5,000 in organizational costs incurred in forming your business, such as incorporation and legal fees.
These deductions are reduced by the amount your total start-up and organizational costs exceed $50,000. Any startup costs above $5,000 can be amortized over a 15-year period.
Keep in mind certain expenses are deductible as startup costs. For instance, licenses required to do business aren’t deductible as startup costs. Business assets such as building, equipment or vehicles also aren’t deductible as startup expenses.
For best results, consult a tax professional to review your specific situation and develop a tax strategy.
Calculating Your Startup Costs Adds up to Success
Accurately estimating your startup costs gives you significant advantages when launching your business. Itemizing your expenses helps you organize your bookkeeping. Calculating your expenses tells you how much financing you’ll need to get your business running. It also allows you to save money on tax deductions.