Calculating and forecasting what you will need to purchase for your new business can be daunting. There are many variables at play that can change as you get closer to making that first sale, making it difficult to estimate how much you need to fundraise from friends, family, and investors.
Budgeting for a small business depends on the type of business you’re running, your location, and your pricing model. Start by categorizing your startup costs into one-time or recurring expenses. Then, use these guidelines as benchmarks to build a budget for your business plan.
One-time vs. recurring startup costs: how to categorize your expenses
Startup costs generally fall under one of two categories: upfront expenses and ongoing costs.
Upfront expenses include things like licenses and business permits, equipment, incorporation fees, registering your business name, and logo design. These are expenses that you’ll pay to physically and legally establish the company. You may need to pay to renew a permit or replace a piece of equipment, but for the most part, these costs will not continue to hit your bottom line.
Ongoing costs can include things like your office or storefront lease, employee expenses, insurance payments, and taxes. These recurring expenses are charged monthly, quarterly, or annually and are vital to the day-to-day operations of running your business.
It’s also worthwhile to include a contingency budget separate from your upfront and recurring categories. Set aside 10–20% of the estimated startup costs as an emergency budget in case there are any expenses you didn’t account for.
Dividing your budget into these categories can help you plan for the future and understand the immediate costs for which you need to budget.
[Read more: How to Determine Your Startup Costs]
Permits and fees
As a new business, there may be permits you need in order to operate legally in your state or municipality. For instance, restaurants need business licenses and inspections to help ensure basic food safety standards are met. Some communities require zoning permits to protect residential neighborhoods, while other businesses may be subject to permits just to sell their product (e.g., health stores or beauty brands).
There are also incorporation fees to consider. If you decide to form an LLC, for instance, you will need to file with your state. “The fee is paid to the secretary of state and typically falls between $100 and $250. Additionally, you’ll be responsible for paying government filing fees, which range from $50 to $200,” wrote NerdWallet.
Speak to your local government to find out if you need specific business licenses or permits to open your new venture.
When it comes to calculating inventory costs, you’ll need to consider more than just what the actual product costs...It’s important to also consider shipping, storage, and other costs associated with inventory.Kickfurther
Equipment and technology
Tech is probably the biggest startup expense for which you need to budget. This category includes things like laptops, a point-of-sale (POS) system, and industry-specific equipment. For instance, a salon will need styling chairs, deep sinks, hairdryers, and styling stations. Restaurants and cafes need commercial-grade ovens, stovetops, refrigerators, and freezers.
Inventory
Inventory is a tricky line item for which to budget. Overestimate how much you need, and you may risk damage, spoilage, or some items becoming obsolete. Underestimate how much you need, and you may miss closing a sale due to stock-outs.
Retailers typically allocate between 17% and 25% of their budget to inventory, depending on the industry. “When it comes to calculating inventory costs, you’ll need to consider more than just what the actual product costs,” wrote Kickfurther, an inventory financing solution. “It’s important to also consider shipping, storage, and other costs associated with inventory.”
Marketing costs
Marketing your new venture takes a combination of upfront and ongoing funding. The upfront costs include things like your logo design, building a website and printing business cards, signage, and other physical assets. Ongoing costs include things like paid social media advertising, digital ad campaigns, email promotions, and influencer campaigns.
The good news is that marketing costs can be flexible. There are plenty of free social media tools that you can use to spread the word about your company. Some of the upfront costs can be managed by outsourcing to freelancers or taking advantage of online tools like Canva to reduce expenses.
Utilities
This category, like marketing, can also be variable. Merchants that are trying to keep expenses to a minimum may choose to operate from their home using an e-commerce model. Others may be opening a retail space, in which case the majority of expenses will go toward the lease, utilities, and in-store equipment.
If you’re the latter, budget $430 to $750 per month for utilities. Utilities include electric, gas, water, internet, and phone bills. And, if you work from home, prepare to see some of these bills also increase. You may need a faster internet connection, for example, to host video calls with your suppliers or new employees.
[Read more: 5 Unexpected Startup Costs You Might Forget to Plan For]
Payroll, contractor, and professional service costs
Wages and other employee costs can add up quickly, depending on your industry. “Labor-intensive industries such as restaurants, retail stores, or construction firms often require staffing up from Day 1, so payroll and benefits can become substantial startup costs,” wrote Stripe. As a benchmark, ADP reports that most businesses spend 7.5% to 30% of revenue on payroll, a budget that includes employee compensation, taxes, benefits, workers’ compensation, and administrative fees.
One way to manage your human resources budget is to work with contractors or freelancers on a part-time basis. Contractors don’t receive the same benefits as full-time employees, and you can save on taxes, too. Fractional hiring is also an option while you scale.
For more help estimating your startup costs, try the SBA’s Startup Costs Worksheet, a simple calculator that can help you estimate and track expenses.
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