A common mistake many first-time business owners make is underestimating the amount
needed to start their new business. In fact, this unintentional miscalculation is
one of the leading reasons why most businesses tend to fail in the first year of
operation. Even though there is never a guaranteed way of knowing a new business
will make a substantial amount of profit or that it will “break-even,” entrepreneurs
still need to properly calculate the different costs before further investing their
time and effort into the startup. Entrepreneurship can be a very costly venture,
and many first-time business owners need to properly assess the many different challenges
that lie ahead, especially when it comes to estimating the startup costs.
For more information regarding why most businesses fail, please refer to
Why Most Businesses Fail
Research estimated costs
One way entrepreneurs can avoid the underestimation of new business costs is by
doing independent research. By simply taking the time out to research the various
anticipated expenses for a new company, business owners will be able to educate
themselves about the industry, any leading competitors, and how much will be needed
to launch and sustain their startup. They also need to analyze the performance of
similar products in the market and determine different ways in which the product
can improve. Research can be conducted through visiting online entrepreneur sites
and by reading small business and startup books. In addition, entrepreneurs can
also speak to other business owners who have experience and success in the same
field. If an entrepreneur does not have the time to conduct independent research,
they are able to hire a professional who can do the research for them. For an average
cost of $50 to $75 per hour ($5,000 minimum), many business owners can conveniently
obtain any needed marketing information for their new business.
Product development and commercialization
One very important component to consider when starting a new business is the process
of new product development and the amount of money it takes to effectively create
a product. Many entrepreneurs will agree this development process not only takes
time and effort to execute but it can also be financially draining. During a new
product’s development, an idea can be generated rather quickly. However, it is the
concept development and testing phase that may take a considerable amount of time
to complete. In this particular phase, entrepreneurs will be faced with the cost
of producing their product. They may also need to invest additional funding into
the product’s test marketing and technical implementation phase, which may require
more specialized revisions before their product can be commercialized.
For more information regarding product and market testing, refer to
New Business Marketing Strategies
Website and technology expenses
Every new business should have an updated, well-detailed website that proudly introduces
their company and its different products and services. Their website should be user-friendly
and designed and maintained by skilled technical professionals. A company’s website
development and maintenance is a necessary cost, especially if the company is interested
in making additional revenue outside of the traditional in-store purchases. In addition,
business owners need to consider other technological expenses, including computers
and accessories with updated specialized software for their company. Website and
technological expenses are essential in today’s innovative and technologically-adept
Another cost to consider when starting a business is office expense. This financial
figure can encompass the combined amount of renting (or buying) office space, office
furniture, telephone and fax lines, high-speed internet access, office supplies,
etc. It can also include licensure costs, down payments and surcharges, office utility
bills, inventory, maintenance, and company-related miscellaneous expenses. Many
entrepreneurs do not realize how important this expense can be in order to properly
sustain a business, and that is the reason why this cost is most often overlooked.
Marketing and advertising costs
Every new business should also be aware that in order to gain public recognition
and paying customers, they will need to spend money on promoting their company and
its products and services. Marketing materials can include anything from professional
business cards and stationery; local, nationwide, and international advertising
campaigns; online and in-store promotional offers; public relations, company flyers
and brochures; internet and telephone marketing, etc. Depending on the type of industry
and the aggressiveness of a company’s public relations approach, this process can
be very expensive.
Basic living salary for business founders
Business owners need to calculate how much their exclusive salary should be during
the initial years of startup development. Even though most entrepreneurs may choose
a modest salary, they should take into consideration the cost of living, including
rent or mortgage payments, car and gas expenses, food, clothing, and other personal
costs that are needed to sustain themselves and their families for about one year.
A founder’s living expense can certainly cost less than their overall startup business
costs; however, its significance should be taken into account since most new businesses
will not reflect any profit for at least one year.
Other employee payroll and benefits
When starting a new business, entrepreneurs should take into account the salaries
and benefits of their employees. First, they should consider if they will be the
sole operator of their business or if employees will work for them. If their business
will encompass the assistance of paid staff members, then the business owner needs
to determine the hierarchy of workers and the number of full-time and part-time
staff so their salaries can be adjusted. In addition, they can also determine who
will be qualified for receiving health insurance and other employee-related benefits.
Employee payroll and benefits are just two of the many different costs needed for
Monthly insurance costs
Another very important expense to keep in mind is the monthly cost of small business
insurance. Every new business needs different kinds of insurance in order to protect
their company, personal assets, and paid employees. For many business owners, the
type of insurance they choose is highly dependent on the nature of their business.
For example, liability insurance can protect a business’ property, while worker’s
compensation insurance abides by state-specific rules when enforced. In addition,
if a new company has a great deal of assets, they may be inclined to purchase property
damage or theft insurance. In addition, company owners and board members may even
consider getting life insurance to protect themselves and their families as well
as legal service insurance which will cover any legal or professional fees.
Legal and professional fees
During the pre-startup phase and throughout a company’s progress, an entrepreneur
will work with many collaborators (including attorneys, accountants, investors,
writers, advisors, etc.) in ensuring the successful launch and development of their
company. Many of the fees these professionals charge do not come at a low cost.
In fact, they are rather expensive to hire and sustain. For example, many attorneys
can charge anywhere from a few thousand dollars to tens of thousands of dollars
just for lease negotiations, patent, trademark and logo planning, and non-disclosure
agreements. Accountants, on the other hand, can also charge just as much, especially
since they are needed for financial guidance and company tax purposes. Entrepreneurs
should never underestimate the need for these hired professionals since they are
the only ones who can provide the necessary guidance to an entrepreneur during the
very stressful time of starting a business.
To learn more about the importance of an attorney for an angel investment, please
Every company should consider travel expenses in their startup costs. These expenses
will usually cover any business-related training outside of the company’s center
of operations. They can include any educational or technical workshops, seminars,
or training for employees and founders. Depending on the number of employees, a
company’s travel expenses may be equally as important as other company expenditures.
The predicted costs for starting a company is often underestimated. An entrepreneur
needs to properly evaluate all the associated expenses that need to be paid prior
to the launch of their new company. Once they are able to consider the different
financial costs, these estimated values should be well-documented in their company’s
business plan. Failure to properly record all financial projections can easily cost
a business owner from obtaining the necessary capital from institutional lenders
and potential investors.
In addition, many business owners apply the “break-even” analysis of marketing.
This is a term that refers to the amount of revenue an entrepreneur needs to receive
in order to cover all company expenses before making any personal profit. This predicted
calculation can closely estimate the potential profitability of a product. Many
experienced entrepreneurs widely use this analysis as a primary screening tool for
any new business ventures. It is a proven fact that entrepreneurs who are able to
successfully “break-even” shortly after the launch of their new business or product
have a greater chance of achieving company success when compared to those who did
not “break-even.” The “break-even” theory closely estimates the viability of a new
business venture and is a theory all business owners should apply.
Once all fundamental costs are carefully measured and well-thought out, the entrepreneur
can then find different sources of funding for their new business. If considering
different sources other than personal financing, they should then attempt to convince
a business investor their product, indeed, shows promise of making a substantial
amount of profit.
For more information about other sources of financing, please refer to
The ABC's of Funding