Woman doing calculations while sitting at desk with laptop.
The type of business you plan to operate (i..e, online or physical store) will help you determine the items you will need to spend money on and estimate the associated costs. — Getty Images/ljubaphoto

Starting a business can be a costly endeavor with many unforeseen and unknown associated expenses. That’s why doing your research and understanding exactly where you’ll need to spend money can be helpful in creating a realistic budget.

Here's how to determine your startup costs so you can plan out how to finance them.

[Read: 9 Low-Cost Business Ideas You Can Start Tomorrow]

Understand your business type and associated expenses

There are three common types of business: brick-and-mortar, online and service-based. Identifying which one(s) your startup will operate as will help you determine your associated costs.

Brick-and-mortar shops are physical locations where customers can go to buy your products. Many customers still prefer the in-person experience to the online one. However, due to the COVID-19 pandemic and online shopping being cheaper than maintaining a physical space, brick-and-mortar shops have been on the decline in the past year. They require the most amount of expenses as the location needs to be kept up and physical inventory always needs to be in the shop.

An online business gives businesses the opportunity to promote and sell their products through a digital space. While there are fewer physical costs associated with an online-only business, entrepreneurs will have to focus a little extra on certain aspects of their business. These can include web design, digital marketing and website servers, to name a few.

Service-based businesses are those that are not selling specific products, but rather performing a specific activity for their clients. Most commonly, these include health care, home repair and cleaning services. They can either operate within a physical space or exclusively online, depending on the specific service.

Here are some of the most common expenses associated with launching a startup:

  • Office space.
  • Supplies and equipment.
  • Communications (messaging software).
  • Utilities (electricity and water).
  • Web design.
  • Insurance.
  • Inventory.
  • Employee salaries.
  • Advertising and marketing.
  • Market research.

You may also have some one-time startup expenses that you’ll have to address when you launch your business, including fees to register your company with your state and/or the federal government. Depending on your industry, you may also need to obtain certain professional licenses and permits at the beginning, which may need to be renewed periodically.

Some other one-time (or infrequent) expenses associated with launching a business include things like website and logo/branding design, business cards and other branded materials, and renovations or improvements to your physical location.

[Read: 6 Strategic Ways Businesses Can Cut Tech Costs]

Estimate your company’s expected profits and do a break-even analysis to determine at what point your company will be profitable.

Identify startup assets

Startup assets are those costs/purchases associated with starting your business, or valuable inventory that allows you to launch your business. A basic example of a startup asset is the amount of cash you have available to put toward your business.

Startup assets differ from business expenses and should be kept separated when filing your return. Business expenses like rent, utilities, contract labor, marketing and other operating costs are tax-deductible, thereby reducing your taxable income. Assets, on the other hand, cannot be deducted from your income.

The most common types of startup assets include:

  • Cash.
  • Office furniture.
  • Computers and phones.
  • Vehicles.
  • Other necessary equipment.

Estimate total costs

Before entrepreneurs start spending money on their new business, they should calculate their total costs. Create a list of business expenses and assets that your startup will need, then estimate how much they will cost. Estimate your company's expected profits and do a break-even analysis to determine at what point your company will be profitable. Remember to keep inflation and ongoing costs in mind, so your budget is accurately assessed for the future.

Use your calculations to get startup funding

Once you know your expected startup costs, you can use that number when seeking out funding. Create a formal report of your expected startup costs, so investors and lenders can understand what you'll use their money for and determine the profitability of your business. Knowing how their money will be used and when they can get it back will make prospective investors more likely to help finance your startup.

[Read: A Practical Guide to Funding Your Small Business with Business Loans and Beyond]

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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Published May 17, 2021