A guide to business start-up costs

Whilst it can be cheaper now than ever to set up a business with the technology available, new start-up business owners shouldn’t underestimate the cost of setting up a company.

Getting your figures planned in advance and being realistic about start-up costs and how you’ll fund them could be the difference between business success and failure. Planning ahead will determine whether your business idea is viable both financially and practically. Cash flow is important at any stage in a business lifecycle but at the start of your business venture it will be the lifeblood of your business in the first 12 months.

What are business start-up costs?

The one question new business owners ask is ‘What are startup costs in a business?’ To put it simply, start-up costs are any expenses incurred during the process of setting up a company. There are three types of start-up costs to consider in your planning:

• Investigative costs
• Pre-launch costs
• Post-launch / ongoing costs

Investigative costs – May be things like consultancy fees, market research expenses or travel expenses etc. to meet potential suppliers or distributors etc.

Pre-launch costs – These costs are the costs you’ll incur when you’ve decided to start a company, but before you start trading. These may be things like premises costs, furniture and equipment, advertising, stock costs, marketing & advertising etc.

Post-launch costs – The cost of running the business, potentially before you are making enough money to cover all your day-to-day costs. Things like premises costs, staff wages etc.

It’s impossible to put a startup cost on a business or give indicative costs as every business is different. So until you sit down and do the planning for your individual business, it is impossible to predict start-up costs accurately.

Also See: How to start a business with no money

What are examples of start-up costs?

Generally start-up costs can be classed as fixed and variable costs and we’ll cover these in more detail later. All the costs above should be considered for start-up investigation (to understand if your business idea will work in reality, pre-launch costs to get the business set-up and post-launch costs that you need to cover potentially before the business can cover these with the revenue it generates.

What is a fixed cost?

Fixed costs are costs that need to be paid, whether your business turns a profit or not. Some industries have very low fixed costs, for example a consultant working at home, will have low fixed costs. Businesses that rely on properties to run, like retail outlets, restaurants, factories, will have much higher fixed costs. Fixed costs can include things like:

Premises costs – rent, rates, utilities bills etc.

Equipment costs - depending on your business you may need to invest in IT equipment to run the business, factory machinery, catering equipment, furniture, or fixtures & fittings.

Staff costs – costs of recruitment, salaries etc.

Insurance – depending on your business type, thinks like professional indemnity insurance, employers’ liability insurance, public liability insurance and building or contents insurance.

Professional fees – For example lawyers’ fees to create contracts, employment contracts advice on rental contracts. Another example is accountancy fees for company formation, registration, setting you up with HMRC or with online accounting software etc.

Sales & marketing –advertising costs, website build costs, email marketing software, networking costs etc.

Stock– depending on your business, you may need to purchase significant up-front stock to get the business off the ground.

Finance costs – Often it’s necessary to take out business loans or finance to fund your start-up costs, so paying these back should be factored into your fixed cost monthly amount.

What is a variable cost?

Variable costs are the start-up costs that change in line with production or sales. If your volume of production or sales goes up, so will your variable costs, if the number of sales or production decreases, so will your variable costs.

Variable costs can include things like:

Production costs – For many businesses the cost of products is one of the largest costs to factor in. If you need raw materials to manufacture something, your production cost will be a high proportion of your overall costs. However, the larger the quantity you purchase, often means a lower per product cost, so you should factor this into your calculations.

Staff wages – can sometimes be a fixed cost if you recruit permanent employees, however if you hire people that you only pay for the hours they work on flexible contracts, or use temporary works at busy times, then these can be classed as variable costs.

Delivery costs – For example postage and packaging and shipping cost. Again depending on volume you may be able to obtain better rates for larger volumes.

Funding your start-up costs

There is a myriad of finance options for start-ups on the market. So, how you fund your start-up is a key decision when beginning your business journey. Options available to you are finance from:

• Your own savings
• Friends and family
• Business loans (startup loans, peer-to-peer lending, short term loans, unsecured business loans)
• Crowdfunding
• Government funding / grants (Innovation grants, startup grants, R&D tax credits, princes trust)
• Equity funding (Angel investors, venture capital, SEIS, EIS)

Also See: Expanding businesses into the UK

Should I minimise start-up costs?

The smaller your start-up costs, the more chance you have of making a profit and surviving the first year. Although it’s a good discipline to not incur costs that are necessary and control costs in your business, it’s important you don’t do this at the expense of business success and growth. So it’s about investing wisely in the future of your business also to make it a success.

When estimating your startup costs, make sure you’ve considered all aspects of your business and include every area of related costs. You’ll stand a better chance of getting loans, attracting investors, estimating, and making profits, and understanding the cash flow of your business.

It’s worthwhile engaging an accountant early in your business start-up process. They can help you with business planning, estimating your start-up costs and ongoing business costs, attracting investors, or gaining funding for your start-up. Here at dns we help thousands of new business owners start their businesses, get funding, and control their costs. Why not contact us today to book a free startup consultationor call us on 03300 886 686 or email enquiry@dnsaccountants.co.uk

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