Calculating startup costs before you launch can help you create a budget, make long-term plans, and establish milestones you need to hit to build a sustainable business. Here, we’ve highlighted common types of startup expenses to consider to help you navigate this process.
Understanding startup costs
Startup costs are incurred when you’re launching your business or once you’ve already launched but don’t yet have the cash flow to cover your expenses. They’re the cost of getting your business off the ground.
These costs include the expenses of getting set up, including domain names and web hosting services, as well as payroll and supplies. An example startup cost is hiring a designer to build your website.
You can begin to calculate your startup costs by creating a business startup costs list, which will become a part of your business plan. A clear view of startup costs allows you to create a cash flow statement that projects your income and expenses in the coming months and year. Cash flow, the net amount of money that comes in and out of your business, is the lifeblood of your business.
One-time versus ongoing costs
Startup costs have differing frequencies. Some are one-time costs while others are recurring.
Let’s say you run an ecommerce company with three employees. Your ongoing costs might include the employees’ payroll, payment processing fees, and vendor payments. One-time costs could be working with a graphic designer on your website or buying a web theme.
Ongoing costs are staples of your business budgets and can be predictable, whereas one-time costs often include unforeseen repairs or payments that you may not have prepared for.
The predictability of ongoing costs makes them easier to budget for. As a rule of thumb, aim for more ongoing costs and fewer one-time costs. Additionally, many one-time costs occur when you’re launching your business. For these costs, do your research ahead of time and ensure that you have sufficient funds to pay for them. These costs can include incorporation fees, buying equipment like computers and printers, and license fees for images.
If you have money in the bank or a business credit card, you can sign up for automated payments for your ongoing costs to ensure you never miss a payment. That way, the only thing you have to worry about is ensuring you have enough money in your bank account.
Essential versus optional costs
Business startup costs have varying levels of importance.
Essential costs are must-have expenses in order to run your business. These vary widely between businesses. For example, if you run a brick-and-mortar business with no employees, your essential costs might include rent, utilities, insurance, and inventory. For an ecommerce company with three employees in California, essential costs might include payroll, website costs, domain and hosting, and payment processing fees.
Optional costs are nice to have but are not necessary. They can be an educational resource or a piece of equipment that might enhance your way of doing business, but you can survive without them. For example, an ecommerce company may eventually pay for social media publishing tools like Buffer or Sprout Social, but these costs aren’t essential for its day-to-day business operations.
When you’re just starting your business, it’s encouraged to stick to your core expenses and to only add optional expenses as you grow and become more profitable.
Fixed versus variable costs
Fixed costs remain the same in amount each month while variable costs fluctuate over time.
Fixed costs include paying rent on a retail space on a five-year lease. Variable costs include utilities, shipping fees, and supply costs.
Fixed costs are the heart of your business budget and are easier to prepare for because the amount you’re paying remains the same. Variable costs can vary depending on the season of your business, and it’s important to plan for how these costs can fluctuate over time. The best way to deal with variable costs is to have a cash buffer.
By keeping tabs on your fixed and variable expenses, you can identify patterns to help prepare for surprise events. For example, if you anticipate that you’ll sell more products when it’s winter in New York, your tax payments and payment processing fees will also be higher. You might plan ahead to have a little extra saved for these months.
Common startup expenses
Although startup costs vary widely depending on your business and the industry it operates in, there are some common expenses worth keeping in mind. Below, we've listed business startup costs have handy as you budget and finally prepare to launch your business.
- Office space: The cost of office space varies widely depending on factors like your location, whether you’re looking to rent or buy, and how much space you'll need. Sometimes, co-working spaces can offer cheaper, more flexible options than traditional rental units. Virtual offices are also popular for small companies. For example, if you’re an ecommerce company with three employees, you might not need or be able to afford a physical space just yet. However, you will still need a place to hold meetings. Subscriptions to video conferencing tool Zoom and workplace chat app Slack can support this need.
- Payroll: Payroll is the process of getting your employees paid and is often cited among the most expensive monthly startup costs. This includes the paychecks you send to employees, as well as processing costs from using payroll platforms like Gusto.
- Website: A website is your digital home on the web and one of the first places customers will go. You’ll need to pay for a domain, web hosting, and a website template or designer. Costs will vary depending on whether you build your website from scratch, use a template from services like Squarespace or WordPress, or hire a professional designer.
- Marketing: Many businesses use marketing to get the word out about their business and reach new people. Marketing costs can include direct mail, social media advertising, search engine marketing, newsletters, flyers, and signage. The Small Business Administration (SBA) recommends that small businesses with less than $5 million in revenue dedicate 7% to 8% of their revenue to marketing efforts.
- Inventory: Businesses that sell products sometimes store inventory. Inventory costs comprise different portions of your total monthly spend based on the product you sell. Quantity, size, storage time, and storage location of your goods are all factors that impact inventory costs. Some companies opt out of inventory altogether, choosing to create products after an order has been placed or by dropshipping.
- Equipment: Equipment costs depend on your industry and your business, but most new companies need to spend money to acquire equipment. This equipment might be ovens and stoves for the baked goods you’re planning to sell online, or laptops for yourself and your founding team. Decide which equipment is a necessary cost before springing to buy anything.
- Incorporation: There are several ways to structure your business, including as a limited liability company and a sole proprietorship. Incorporation is a popular option for ecommerce companies. The structure provides your business with several benefits, including the protection of your personal assets and the ability to open a business bank account. The costs of incorporation can include fees for filing articles of incorporation with the Secretary of State, franchise taxes, and getting an attorney.
Frequently asked questions
We’ve broken down some common questions below.
Are business startup costs tax-deductible?
It’s important to understand the distinction between startup costs and business expenses because the IRS treats both of these costs differently.
According to the IRS, startup costs are related to the creation, launch, or acquisition of a business. These include advertising, training new employees, and traveling to new cities to find a workspace. It’s possible to deduct up to $5,000 in startup costs.
Organizational costs include any costs involved in forming your business, including the cost of incorporation and stipends you might pay temporary directors. Like startup costs, it’s possible to deduct up to $5,000 in organizational costs.
In both of these cases, if your total startup costs exceed $50,000, the amount you can deduct from $5,000 will be reduced by the amount you go over. For example, if your total expenses are $52,000, that is $2,000 over the allotted amount. Take your overage amount and subtract it from the $5,000 deduction. The total amount you can deduct is $3,000.
On the other hand, business expenses are those that are ordinary and necessary to run your business.
Ordinary expenses are those that are common in your industry. Necessary expenses are those required for you to run your business. Ordinary and necessary expenses include payroll costs, taxes, and insurance.
Owners can deduct up to 20% of qualified business income. Your expenses can be deducted from your adjusted gross income (AGI), effectively lowering the amount you’ll pay in taxes.
There are many gray areas you will encounter when trying to figure out which costs are tax-deductible. For questions about your situation, it’s a good idea to seek out help from a tax professional.
Did you know?
The R&D tax credit is the most significant tax credit that the IRS offers to U.S. companies. Qualifying companies can receive up to $250,000 to offset their payroll taxes—and even more if they have income tax liabilities.
How do I calculate total startup fees?
Understanding how much it costs to run your business will help you work toward profitability. To calculate startup fees, list out your potential expenses and their estimated costs.
The Small Business Administration has a startup costs worksheet that can help you with this process.
Take all of the pertinent expenses mentioned above and create estimates for each category. Remember: some expenses are clear-cut and fixed while others are one-time expenses that are more amorphous. Do your best to estimate costs based on current market conditions and research. Once you have your list complete, add up all of your projected numbers.
How do I project cash flow?
Cash flow provides insight into how much money is going in and out of your company during a given time period. A cash flow statement includes all cash inflows and outflows, meaning that it shows how much money has entered your business and how much has left it.
A cash flow statement can give you, your team, and your investors insight into the state of your business. You can use apps like Float or accounting software such as QuickBooks to review your cash flow. You can also calculate it yourself by following the steps below.
- List your beginning balance for the first month
- Estimate how much cash you’ll have coming in, as well as your expenses, during that month
- Subtract your cash outflows from cash inflows to reach your remaining balance
- This remaining balance will become the beginning balance for the following month. Repeat this process to create a cash flow projection for the year
Your cash flow is not your profits. It may be higher or lower than your profits depending on cash volume, the time frame of the report, and whether the report is accrual- or cash-basis.
You can also view your business through a Profit and Loss Statement (P&L), which shows your net profit after all expenses are covered. P&L statements, sometimes referred to as income statements, can be used to understand your business’ viability. To make your own P&L:
- List out all sources of income
- List all expenses
- Subtract expenses from income
- Review net profit
As part of your cash flow projections, consider the timing of the money that flows in and out of your business. For example, you may have annual insurance payments in January, but not during the rest of the year. Or you might receive payments from customers at different times depending on your payment terms, such as net-30 or net-60, which means payment is due within 30 days or 60 days.
Estimating the fees that come with starting and running your business is essential for building a strong foundation for your ecommerce business, ensuring its sustainable growth, and cementing its path to long-term success.
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