How Much Does it Cost to Start a Business?

January 22, 2021
by
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Starting a business is an investment. But do you know how much of an investment your startup cost will be? 


The cost of starting a business depends on the type of business you have, the market you’re targeting, and your specific business plan. This article will cover the common upfront and operational costs of starting a business, from mom-and-pop shops to the next global tech giant. 


Consider the following steps to calculate how much money it will take to fund your startup:


  • Estimate your operating costs
  • Identify different types of costs
  • Anticipate time spent 
  • Seek out financing 


How Much Money Do You Need to Start a Business: Estimate Your Operating Costs 

The price range associated with starting your business will depend heavily on your product or service offerings and the size of your business, not to mention where you’re located. For instance, the cost of rent for a 2,000 square-foot office space will be different if you’re based out of San Francisco versus Marietta, Ohio.


But, whether you’re interested in pursuing a small-scale sole proprietorship or a large-scale C corporation, there is a common thread of upfront costs you’ll inevitably encounter, including:


  • Office or storefront rent
  • Utilities
  • Transportation
  • Payroll
  • Recruitment
  • Marketing and advertising
  • Business insurance
  • Creating a website 
  • Business cards 
  • IT assistance
  • Legal support 


The key to estimating your startup costs as a business owner is to consider every possibility. Overestimating will serve you better in the long run than underestimating


If you’re having trouble envisioning all the ways in which you’ll need to spend money to run your business, The U.S. Small Business Administration has a handy worksheet to assist you. Designed around a hypothetical pizza parlor, the worksheet estimates that this make-believe business will cost nearly $20,000 to get up and running. The worksheet takes into account different types of costs, which is a useful way to construct your overall startup budget. 

 

Identify Different Types of Costs

Operating expenses are just one type of cost you’ll experience as a small business owner. 


As an analogy, consider how a one-time trip to the ER will cost you a certain dollar amount, while your monthly health insurance payment will cost you something else entirely. But you’ll need to budget for both. 


When asking yourself, “How much money do I need to start a business?” you’ll need to account for the following:


  • One-off expenses vs ongoing costs
  • Essential expenses vs optional costs
  • Fixed expenses vs variable costs 


One-Off Expenses vs Ongoing Costs

One-time costs are most often associated with the “starting a business” phase. They often include: 


  • Launching a new website
  • Paying filing fees for registering your business name
  • Investing in an initial, full-scale advertising and marketing campaign to drum up interest in your enterprise 


Ongoing business costs are just what the name suggests, ongoing—identifying and budgeting for these costs is imperative, as you’ll be saddled with them for the duration of your business’ lifespan. Examples of ongoing costs include: 


  • Rent or mortgage 
  • Utilities including electricity, water, and internet
  • Salaries 
  • Equipment maintenance


Essential Expenses vs Optional Costs

When starting a new business, it’s critical to separate the essentials from the nonessentials. Optional costs do not need to be disregarded completely; they can simply be shelved until the business is up and running and turning over a profit. 


Examples of essential startup business costs would be keeping the lights on in your office. An optional cost would be spending hundreds of dollars on flashy, custom business cards—while exciting, definitely not necessary. 


Fixed Expenses vs Variable Costs

Fixed costs remain steady regardless of external circumstances, like the cost of rent or small business loan payments


Variable costs fluctuate in relation to a change in activity and sales, like raw material expenses—the more products you sell, the more you have to spend on raw materials. Variable expenses can change quickly, so it’s important to monitor closely and budget accordingly as a small business owner. 


An example of a variable cost using our hypothetical pizza parlor would be the need to hire part-time staff during the busy season. You’ll have to account for these added salaries as you tally up your monthly company spend. Ideally, this is offset by higher pizza sales—but the equation isn’t always 1 to 1. 


Anticipate Time Spent

There is no better adage for the small business world than: time is money


When answering the query, “How much money do you need to start a business?” you would be remiss to not include the cost of hours spent setting up a new enterprise. The most time-consuming of these one-off setup operations include preliminary research to identify your position within the market and laying the foundation for your entire business plan.


Conduct Market Research 

Just as you’ll thoroughly outline and estimate your new business costs, you’ll need to conduct your own research through surveys, questionnaires, and online research before getting too far into operational first steps. 


When crafting these research tools, ask yourself (and subsequently, your audience) questions that will guide you to a product or service that will succeed within the marketplace. Questions like:


  • If this product or service existed, would you purchase it? Why or why not?
  • How much would you pay for this product or service?
  • Who do you think would use this product or service? Why?
  • Does this product or service remind you of another business? 
  • What could differentiate this product or service from the competition?


What you’re trying to identify through market research is who, what, and how much. Who is your target audience? What does your target audience want? How much are they willing to pay for it?


From there, the secondary part of your market research is to take this information globally. If your product is specifically designed for Gen Z or people who are entering retirement, the subsequent question is then: How large is this audience?


This is where data from sources like the U.S. Census Bureau and the Statistics of U.S. Businesses will come in handy.


Using this information, you can start to identify the market potential of your idea. Put simply, if you can sell your product for $40 to a target audience of 2 million people, your potential market value is $80 million.


With your idea reaffirmed by the market, it’s time to flesh out your operations through your business plan.


Create a Business Plan

The business plan is the compass of your fledgling business. It offers you (and potential investors) a sense of direction—where you’re going in the first few years of operating. As such, there are eight sections to build out for a comprehensive business plan, according to the SBA, including: 


  • Executive summary
  • Company description
  • Market analysis (which you’ve already completed!)
  • Organizational and management structure
  • Service or product specifications
  • Marketing and sales
  • Requests for funding
  • Financial projections


The ultimate purpose of building out this document is two-fold. Primarily, it will put the business venture in your head down on paper, so you and others can critique it more efficiently. Secondarily, should you need capital to get off the ground, the business plan is the critical piece that investors will look at to consider whether your business promises a return on their investment.


Seek Out Financing

Finding experienced angel investors and venture capitalists to help fund your new business is a great way to avoid borrowing thousands upon thousands of dollars from a traditional bank.


If that is not a feasible option, you can also look into the following:


  • Applying for grants offered by the U.S. Small Business Administration
  • Crowdfunding on platforms like Kickstarter
  • Applying through the U.S. Department of the Treasury for a CDFI loan 


Whether you’re borrowing money from a traditional or nontraditional entity or receiving funds with no strings attached for your business expenses, you’ll want to start looking for cost-saving opportunities the moment your business hits the ground. 


Ramp: Saving You Money With Every Purchase 

So, how much does it cost to start a business? While there is no set startup amount for every business—your plan, location, and the market you’re entering will ultimately affect how much it costs to start a new enterprise. One cost certainty is that with the right corporate card and expense management platform on your side, you can save time and money.


With the smart corporate card Ramp, you’ll automatically start saving with cash back rewards and built-in automated accounting workflows for your business expenses. Don’t worry over the minutiae of manual expense reports—Ramp takes care of that for you. 


Check out all that Ramp can offer your business. 



Sources

Business News Daily

SBA
BND.

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