Starting a small business can be exciting. However, this excitement is often accompanied by fear of failure. Many entrepreneurs worry about the financial burden of running a new business. After all, it takes money to make money.
The early stages of building a business are especially financially demanding. Without careful planning and meticulous accounting, many first-time entrepreneurs are caught unawares by a number of start-up costs. New entrepreneurs assume that by focusing on selling, they can manage to keep the operation afloat, usually with abysmal results.
It’s important to note that all businesses are different and therefore have different kinds of start-up costs. For instance, online businesses have different needs compared to brick-and-mortar businesses. That said, there are some common start-up expenses that every entrepreneur should be aware of before venturing into a new business.
1. Research expenses
Market research is usually one of the first expenses for any kind of business. During this phase, you research on the viability of your idea, your target customers, how to market your product, how to brand your business effectively and so on.
Skipping this important step in starting a business can be costly in the long run. It can lead to indecision and inaction as you’re unprepared for different scenarios that might challenge your business.
Some business owners choose to do market research all by themselves, while others pay market research firms to assist them. Of course, if you choose to hire a firm, this is a cost that you have to include in your business budget.
2. Borrowing costs
Most entrepreneurs rely on business loans to start their businesses. These loans are accompanied with interest payments. If you don’t take loan interests into account when budgeting, they might be one of those costs that catch you by surprise and derail your business success.
The real cost of taking a loan involves much more than just the interest rates. There are various monetary and nonmonetary costs you should consider before signing the dotted line of the loan papers. Think of the direct financial costs (such as interest rates, points, penalties and required account balances), indirect costs and loan conditions (such as periodic financial reporting, maintenance of certain financial covenants and subordination agreements) and personal guarantees needed to obtain the loan.
Shop around for a bank that offers the best rates. Don’t assume that the rates are set in stone – in many cases, you can negotiate a lower rate. Although the negotiable range is often very small, every bit you save for your start-up counts. After acquiring the loan, make sure to always make your payments in time to avoid expensive penalties.
3. Technology costs
Today’s world is highly digital and to maximise your business success, you will have to invest in building an online presence. Expenses under this umbrella include paying for the creation and maintenance of a website, setting up information systems, and acquiring necessary software for your business.
You can save up on technology-associated costs by doing some of the work yourself. For example, you don’t need to be an IT guru to create a WordPress site or run your business’ social media platforms.
Other budget-friendly options include outsourcing to relatively cheap freelancers. You can ask your network to recommend competent freelancers or use sites such as Fiverr and Indeed to find people to work with.
4. Equipment and supplies
Every good business plan includes equipment and supplies that the business will need in its operations. For instance, if you’re starting a courier business, you will have to invest in some form of transport such as motorbikes, a car, or a truck. If you’re opening a hair salon, you will need hair dryers, hair oils, and hair treatments.
Depending on your industry, the kind of equipment or supplies you need can be one of the major expenses at the beginning. Acquiring the needed equipment is probably the reason many entrepreneurs take business loans.
If the equipment is too expensive to buy at the beginning, consider options such as leasing. No matter how you finance, this should be an area that you prioritise in your budget.
5. Marketing and advertising
A new business is unlikely to succeed without any form of promotion. Promoting a business includes everything that a company does to attract customers or clients. This might include paying for social media ads, advertising in mainstream media, investing in banners, creating business cards and so on.
If it is your first ride on the rodeo, you can easily end up making costly blunders with poor marketing strategies. For instance, you might get excited about seeing your product on a billboard but fail to consider its ROI (return on investment). At the beginning, every expense should be highly calculated. If you can afford it, consider hiring a marketing firm to help you create effective marketing campaigns.
6. Employee costs
If you are planning to hire employees to help you grow your business, you must budget for the cost of wages, salaries, stipends, commissions, overtime pay and other benefits. If you don’t remunerate your employees competitively, it can lead to low morale, lack of commitment, bad publicity and high turnover – all of which can be disastrous to a business.
Additionally, you need to allocate some funds to pay yourself. You might find it difficult to decide how much you need to pay yourself. Determine a realistic amount to withdraw from the business to live on. The goal is to pay yourself enough to sustain both your lifestyle and the business. Include this figure into your monthly budget and as much as possible, avoid taking any extra funds from the business for personal use.