Launching any type of company is going to cost money. The question is how much? There isn’t a one-size-fits-all answer because business startup costs can change dramatically depending on factors like your industry, product development needs and how you’ll finance the business.That’s why, in order to answer the question “How much does it cost to start a business?” you need to analyze your situation first.
This step-by-step guide shows how you can estimate your expected costs and revenue to come up with a business plan, while also explaining how much you’d pay during each step of the analysis.
1. Research your market.
The first step to developing your business plan is to figure out the market for your product or service. Take the time to research the number of customers in your target market, their total budget and what they are currently spending on competing goods or services.
You could personally run a survey to get this information from your prospects, like by sending out cold emails to a targeted list or going to a public location where you know your ideal customers would be. You could also search online for market research data from your industry and find business plans from similar companies to get an idea about your potential sales and revenue.
With this information, you can come up with a rough forecast for how much you’d earn in the beginning. For example, if your customers say they’d pay $400 for your product and you expect to make 10,000 sales in the first year, your year one revenue forecast would $4 million.
Estimated Costs: Free, if you rely on web research and survey the market yourself. If you hire a market research firm, there will be a charge. A 2018 report from market research provider Vernon Research Group estimates that an online consumer research study costs clients between $15,000 to $35,000.
2. Estimate your likely costs.
After you’ve figured out the cost of starting a business, the next step is figuring out what it would cost to run your business. Make a detailed list of all the expected expenses for your first 12 months of operations.
These would include the initial business startup costs like buying equipment, developing your product/service and covering legal expenses to set up your business. From that point on, you’ll also have the normal operating expenses to run the business, such as employee salaries, overhead such as rent and utilities, marketing and insurance.
Be sure to break the expenses down into categories so you can plan over time: one-time versus ongoing, essential vs. optional, and fixed versus variable. Fixed expenses are those that stay the same each month while variable can change. For example, inventory costs go up and down based on your total sales.
You can then compare your expected costs against your revenue forecast for the first year to see what kind of budget shortfall you’d have.
Estimated Costs: Free, if you build the financial model yourself. Or you can hire an accountant or financial analyst to build one for you. The exact cost will depend on their hourly rate but expect to pay several hundred dollars or more depending on the complexity of your business.
3. Explore financing.
Chances are when you calculate the answer to the question “How much does it cost to start a business?” the expenses will be higher than your initial expected revenue. Startup financing could help you bridge this gap. You may think that getting a small-business loan could be the way to get started. While this could be a possibility, qualifying for loans can be difficult before you’ve developed a reliable revenue stream.
With your formal business plan ready to go, you may feel ready to launch your company. But first, consider double checking with the experts
Another option is to raise money through investors, like a local angel investment group or family members interested in supporting your business. For the initial years, you may have to rely on your personal savings and credit cards to bootstrap the initial business startup costs. Don’t count on outside financing until you’re a little more established.
Estimated Costs: Depends on the type of financing. Banks and loans will charge interest whereas investors will take equity (a percentage of the company). Bootstrapping won’t have a cost, because you are using your own money to cover everything.
4. Build a business plan.
By combining the earlier parts of this checklist, you have the information needed to write out a formal business plan. This should have sections like a description of products or services, your target customer profile, the total market opportunity and financial projections listing your revenue and cost forecasts.
In this document, be sure to list the KPIs (key performance indicators) showing the strength of your business. Some of the most important to include are your gross profit margin, revenue growth rate, expected market share and number of new customers per quarter.
You can show this business plan to potential lenders and investors for funding. It’s also the road map for running your business during the first few years.
Estimated Costs: If you do all the work yourself, putting together a business plan should be free. You could also hire a consultant to put one together for several thousand dollars. For a low-cost approach, you could use an online service.
5. Ask the experts.
With your formal business plan ready to go, you may feel ready to launch your company. But first, consider double checking with the experts. If you have any colleagues with more business experience, you can pitch them your idea and get their feedback. Not only could they offer valuable insight, they may also be willing to join your team as an advisor or investor.
You could also contact organizations like the Small Business Administration, SCORE, your chamber of commerce and local startup groups to see what kind of mentorship they offer for new business owners.
Estimated Costs: Can be free if you work with your personal network. Startup groups may charge a membership or meeting fee in exchange for their advice.
By going through all the steps in this process, you’ll not only have a better feeling for how much it costs to start a business, you can also feel more confident in your overall business plan and strategy.