How much does it cost to start your own business?
According to an estimate by the Kauffmann Foundation, the average business start-up cost in 2009 was $30,000. However, every business is different and so is its budget. Many micro-businesses such as home-based sole proprietorships can get off the ground with less than $3,000! Some home-based franchises in fact, might have upfront investments as low as $1,000-$5,000!
All the same, costs vary depending on the business so it it imperative to understand the costs of your particular business and how to reach your breakeven point before you get started.
Here are some simple tips for calculating your start-up costs:
Step 1: List Expected Expenses
Start-up costs are technically defined as any costs incurred before income. It’s an important distinction to make because they will impact your tax return. Start-up costs are broken down as follows :
1. Expenses – Costs that come with preparing to open a business such as market research, advertising, training, wages, mileage costs for scoping out a location, and any fees paid to professional consultants (lawyers or accountants).
Up to $5,000 of these costs are tax deductible in the first year of business. The remaining costs are then amortized (meaning you deduct them in equal installments) over a period of 180 months (starting with the month in which your business opens).
However, it's important to note that the deduction benefit from your research will be considered personal costs and non deductible if you decide not to open a business. Read more about the ins and outs of start-up deductions in How to Write Off the Expense of Starting Your Business.
2. Capital Expenditures – One-time costs to purchase assets such as inventory, property, vehicles,etc. These don’t typically qualify for a deduction, but can be written off through depreciation.
Assess Your Assets
Part of starting a business from scratch means taking a risk with personal investment. The money you currently have in the bank will be your primary asset for a while, used to pay off necessary business and personal expenses such as payroll, rent, utilities, etc. until the business is self-sustaining.
Using a spreadsheet, create a list of the start-up expenses and capital expenditures that you expect to incur, alongside the assets that you have. Try to assign costs to each expense, even if it’s a best guess.
Make the Calculation
After you've created your estimates on the spreadsheet, you can easily calculate your costs with the free Starting Costs Estimator Calculator, developed by PaloAlto Software and offered by Entrepreneur.com. It also includes a sliding scale that lets you estimate your cash reserve needs based on your estimated monthly spending and money in the bank.
If the costs look too high, revisit your expenses and look for ways to cut them. If you need meeting space but can’t afford a commercial lease, consider co-working spaces or serviced office space. You can also cut the cost of many office tools by using cloud-based services instead of pricey software licenses (use google drive instead of purchasing Microsoft Office).
Here are a few more resources to bookmark:
- SBA Learning Center’s Starting a Business Online Courses
- Build Your Business Plan Tool – This free interactive online tool provides you with a step-by-step guide to help you get started.
- SBA’s Thinking About Starting a Business Guide
By: Kevin Hickman
Content from this article was re-blogged from Caron Beesely, who works with the SBA.gov team.