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How much does it cost to start your own business?
Of course, the answer depends on your business model and your chosen industry. However, the Ewing Marion Kauffman Foundation estimated in 2009 that the average cost was just over $30,000.
Many small businesses, particularly freelance, online and home-based businesses, come in a lot lower than this, often needing only a few thousand to get started.
But averages aside, what can you do to calculate your specific start-up costs?
Understand the types of costs a start-up will incur
Before you do any estimating, it's important to understand how start-up costs are categorized. All start-up costs (meaning costs in the period before you start generating income) include two kinds of spending: expenses and capital expenditures.
- Expenses. These are the costs for operations that occur during the start-up phase. They include tax-deductible costs such as travel, payroll, rent, office supplies, marketing materials, etc. They also include initial organizational costs like legal fees and state incorporation fees. Many (but not all) of these costs are tax deductible, up to $5,000 in the first year of doing business. You can deduct the remaining costs in equal instalments over a period of 180 months (starting with the month in which your business opens).
- Capital Expenditures. Also known as capital expenses, these are the one-time costs of buying assets such as inventory, property, vehicles or equipment as well as making upfront payments for security deposits. These start-up assets don't usually qualify for deduction, but some can be written off through depreciation at tax time.
You can read more about the difference between these two categories and why it's important to keep good expense records in the Small Business Administration's guide on Filing and Paying Taxes.
Define what you need to spend money on
To estimate your start-up costs, begin by creating two lists — one of things you'll treat as expenses, one for your assets. Don't forget to consider items such as brochures, business cards and website development costs or any security deposits you need to make. Consider whether you need the help of a consultant, tax adviser or lawyer to get started. Next, categorize these items as essential or optional — do you really need to spend money on these before you start making any kind of income?
Now we come to crunch time — assigning specific dollar amounts to your lists. This process is always going to be a best guess, but be realistic and use past experience, research and advice from other entrepreneurs to guide your cost estimates. Organizations such as SCORE and your local Small Business Development Center or Women's Business Development Center can provide free and valuable advice about how to calculate your start-up costs.
Whatever you do, don't underestimate your costs or try to force your costs to fit the amount of money you have available. If the costs are too high, consider another approach to starting a business.
- Could you run your business from your home rather than having a separate facility?
- Instead of buying inventory upfront, could you have manufacturers drop-ship directly to your customers?
- Would you save money if you subcontracted rather than hired employees?
- What about buying surplus office equipment and furniture from the government at or below cost?
Remember, as mentioned above, start-up costs are accrued before you have any income flowing in. So develop your budget with this in mind.