Business Startup Costs: How To Calculate And Budget (2024)

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Starting a business comes with a variety of costs, which may require you to seek external business financing. In fact, entrepreneurs file millions of business applications every year in the U.S. The number of new business applications surged to a record 4.5 million in 2020, according to the Economic Innovation Group.

If you’re working to get your own business up and running, it’s crucial to understand the different costs you might encounter. Knowing potential business startup costs upfront makes you better prepared as an entrepreneur and can improve your odds of success.

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How to Calculate the Cost of Starting a Business

There’s no set cost to start a business—many factors can impact your initial startup expenses. In some cases, you might be able to get a company off the ground with a few thousand dollars. Other small business owners might need to come up with five figures (perhaps several times over) during their first year in operation.

With such a wide range of potential expenses, it’s helpful to start with a business plan. A separate startup cost analysis can help you estimate your costs as well. The U.S. Small Business Administration (SBA) provides free guidance and sample worksheets you can use for both.

Taking the time to write out (and add up) your initial startup costs is a smart move. This extra preparation on the front end can lead to more realistic expectations and better long-term results for your new business endeavor.

Common Business Startup Costs

Go through the common business startup costs below to determine which expenses your business might encounter.

Incorporation Fees ($145)

One of the first tasks you’ll need to complete when you form a new business is choosing a business entity. General business structure choices include:

  • Sole proprietorship
  • Partnership
  • Corporation
  • Limited Liability Company (LLC)

The average cost to register a business is $145. However, filing fees and other associated costs can differ based on the state where you operate.

Research Expenses ($100–$30,000+)

Researching the market you plan to enter puts your business in a better position to succeed. Some entrepreneurs attempt to do this research on their own. However, hiring a professional market research firm could give you a clearer picture of the industry, your target customers and your competition.

The price of market research can vary depending on the type of report and guidance you require. High-level market overviews might cost a few hundred to a few thousand dollars. A more detailed and personalized project by comparison could cost at least $30,000.

Equipment ($11,000–$125,000)

Regardless of your type of business, it probably needs some type of equipment to operate. Even online microbusinesses need access to a computer or device and an internet connection. Other types of businesses may have much more demanding equipment needs that could cost tens or even hundreds of thousands of dollars.

Below is a look at sample startup equipment costs for several different types of industries. (Your experience could be different.)

  • Hotels and restaurants: $125,000
  • Real estate and rentals: $75,000
  • Insurance and finance: $52,000
  • Retail establishments: $32,000
  • Health care: $27,000
  • Warehousing and transportation: $16,000
  • Arts and entertainment: $16,000
  • Service-based businesses: $14,000–$18,000
  • Construction: $14,000
  • Support for other businesses (administrative or janitorial): $11,000

Office Space ($300–$1,230 per Month, per Employee)

With certain types of businesses, you might be able to operate from your home. But if your company requires office space, the cost of renting or buying a facility can add up.

Just like residential rent and mortgage costs, the price of securing office space for your business has a lot to do with your location. The size of your office will of course influence the price you pay as well.

The cost of office space starts around $300 per month (per employee). Yet in high-cost areas like San Francisco or New York, your monthly office space cost could be over $1,230 per person.

Utilities ($2.14 Per Square Foot)

On top of a monthly lease or loan payment for office space, you need to prepare for the added expense of utility services. For commercial buildings, the average utility cost is $2.14 per square foot, according to Building Owners and Managers Association International. The larger your office space and the more employees your business has, the higher its utility costs may climb.

Inventory (25%–35% of Operational Budget)

If your company plans to sell products to its customers, you’ll need to have some inventory on hand to fulfill orders. Inventory costs can require a significant financial investment. But the actual amount your business needs to spend here depends on numerous factors.

Most businesses that require inventory spend between 25% to 35% of their operational budgets on related costs. Initially, it can be hard to gauge how much your business will spend in this category. To estimate potential inventory costs, start by figuring out how much product you expect to sell in a 12-month period. Then, divide that number by 10, aiming to keep 10% of your annual inventory needs in stock.

Let’s say you plan to sell $75,000 in inventory over the next year. If you wanted to keep 10% of that number available to sell to customers, you’d need to purchase $7,500 in inventory.

Marketing and Advertising (Up to 7%–8% of Revenue)

Getting the word out about your business is essential. But you have to be careful not to overdo it on marketing and advertising expenses—especially as a new company.

The SBA advises limiting your marketing expenses to 7% or 8% of your revenue. However, if your profit margins are on the low side (less than 10%), you might want to adjust your marketing budget down until those numbers improve.

Website Development (Up to $10,000)

Creating a professional online presence is essential for most businesses. The question you have to answer as a startup is whether you want to hire someone to create a website for your business or try to tackle the project yourself.

Depending on your skill set and time constraints, you might be able to design your own starter website. Services like Squarespace and WordPress have templates available that can make the job easier and far more affordable. If you hire a professional website designer to develop your website, the cost might run between $2,000 and $10,000. However, website packages often include branding services that could benefit your business as well.

Office Supplies and Furniture ($200–$1,000 per Month, per Employee)

Whether you’re operating your business from home or you have a dedicated outside office space, your business will probably need to spend some money on office supplies. Depending on the type of business, you might need to purchase:

  • Chairs and desks
  • Computers, tablets and software
  • Phones and headsets
  • Breakroom furniture and appliances
  • Waiting room furniture
  • Filing cabinets
  • Paper goods
  • Ink, toner and other printing supplies
  • Pens, paperclips, staples and notebooks

You might spend anywhere from $200 to $1,000 per month (per employee) on office supplies. But these costs can vary widely depending on your budgeting choices and the types of perks you want to offer employees.

Payroll (15% to 50% of Your Budget)

Payroll is one of the biggest expenses most businesses encounter. Yet finding quality team members and providing them with fair and competitive compensation is crucial if you want your company to thrive.

For many companies, payroll costs account for anywhere from 15% to 30% of their overall budget. Some businesses dedicate up to half of their budget to payroll expenses and still generate significant profit margins.

On top of salary and wages, be sure to factor the following costs into your company’s payroll expenses:

  • Commissions
  • Bonuses
  • Benefits
  • Paid time off
  • Overtime pay

Professional Consultants ($75 to $400 per Hour)

As a new business, there may be many tasks that you try to manage on your own to save money. The cost of professional services, after all, can be pricey—running anywhere from $75 to $400 per hour.

For certain jobs, however, hiring a professional could be a wise investment. For legal matters, paying an attorney for advice and guidance can help you avoid potentially costly mistakes. Working with a CPA or bookkeeper could help your business make sure it’s meeting its tax obligations as required.

Insurance ($46–$86 per Month, per Policy)

Insurance is another important cost you should budget for as a new business owner. Depending on the type of business you operate, some types of business insurance coverage may be more important than others.

Below are some of the insurance options you may want to consider, along with the median monthly premium for each.

  • Workers’ compensation: $86 per month
  • General liability: $53 per month
  • Business owners’ policy: $84 per month
  • Professional liability: $46 per month

If you take out multiple business insurance policies with the same provider, you might be eligible for a bundle discount that could help you save money.

Taxes (Cost Varies)

Benjamin Franklin once wrote that nothing is certain in this world except death and taxes. So, it shouldn’t come as a surprise that your new business will have tax obligations to pay as well.

Your business structure, revenue and expenses can all influence how much your business has to pay in taxes. Working with a CPA to calculate your tax requirements and look for potential savings strategies is often your best bet.

The corporate tax rate is currently 21%, but there have been recent proposals in Congress to increase that number. In general, saving at least 25% of business profits is advisable, but you should talk to a reputable tax professional for advice.

How to Get Startup Business Financing

Finding the funds to cover startup costs, not to mention other business expenses that may arise, can be a challenge. But the right business financing has the potential to break big expenses down into smaller payments that are easier to manage.

If you’re interested in applying for a business loan, calculate how much you can afford to pay each month so that you don’t overextend yourself. Then, take the time to research and compare available business financing options to make sure you find the best deal available for your company.

Related: Best Startup Business Loans

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Business Startup Costs: How To Calculate And Budget (2024)


How do you calculate startup costs? ›

How to calculate startup costs
  1. Identify your expenses. Start by writing down the startup costs you've already incurred — but don't stop there. ...
  2. Estimate your costs. Once you've developed a list of your business needs, note the average cost for each category. ...
  3. Do the math. ...
  4. Add a cushion. ...
  5. Put the numbers to work.

What should be included when calculating a start up costs for a business? ›

Startup costs are the expenses incurred during the process of creating a new business. Pre-opening startup costs include a business plan, research expenses, borrowing costs, and expenses for technology. Post-opening startup costs include advertising, promotion, and employee expenses.

What are 3 examples of start up costs of a business? ›

What are examples of startup costs? Examples of startup costs include licensing and permits, insurance, office supplies, payroll, marketing costs, research expenses, and utilities.

How do you calculate the cost of a business? ›

Add up your company's costs, like office supplies, operating expenses, payroll costs and business loan payments. Then, use this formula: Net Income = Revenue – Expenses.

What's the average startup cost for a business? ›

How Much Money on Average to Start a Business? On average, startup and first-year costs often fall between $30,000 and $40,000. However, it is possible to start a business with an initial investment of $0, $100, $1,000, all the way up to millions of dollars.

How much funding does a startup need? ›

Ideally, founders should give up shares or equity worth as little as 10% of the startup in the seed round. However, most cases require up to 20% dilution but it should be remembered that anything over 25% may be a bad deal for the founder. Knowing the investor's intent may help founders out during the negotiations.

How are startup costs treated in accounting? ›

Essentially, the accounting for startup activities is to expense them as incurred. While the guidance is simple enough, the key issue is not to assume that other costs similar to start-up costs should be treated in the same way.

Why do we need to estimate your startup business cost? ›

Use your startup cost calculations to get startup funding

Investors and lenders compare expected costs to projected revenue and determine the potential for your business to profit.

Can you write off start-up business expenses? ›

A start-up cost is recoverable if it meets both of the following requirements: It's a cost a business could deduct if they paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into.

What is the most common mistake start up businesses make? ›

9 common mistakes to avoid when starting a new business
  1. Neglecting to make a business plan. ...
  2. Inadequate financial preparation and resources. ...
  3. Failing to monitor progress and adjust. ...
  4. Buying assets with your cash flow. ...
  5. Avoiding outside help. ...
  6. Setting the wrong price. ...
  7. Ignoring technology. ...
  8. Neglecting online marketing.

How do you calculate monthly expenses? ›

To get the average, add up the amount of money spent for 12 consecutive months, then divide by 12. This will give an average of how much has been spent per month. Calculating average monthly expenses requires actual or estimated figures for all monthly costs.

What are the 3 main methods of cost estimating? ›

Methods of Cost Estimation in Projects. 1) Expert Judgement Method. 2) Analogous Estimating Method. 3) Parametric Estimating Method.

How do you value a business quickly? ›

All you need to do to quickly determine the value of your business is to calculate SDE and multiply it by the average market multiple for your industry. It's key to determine what your market multiple is, and having access to successfully completed transactions is vital in this research.

What are the 4 types of cost? ›

Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.

How do you draw up a business plan? ›

Traditional business plans use some combination of these nine sections.
  1. Executive summary. Briefly tell your reader what your company is and why it will be successful. ...
  2. Company description. ...
  3. Market analysis. ...
  4. Organization and management. ...
  5. Service or product line. ...
  6. Marketing and sales. ...
  7. Funding request. ...
  8. Financial projections.

What does start up cost mean? ›

Start-up costs can be defined fairly simply as the expenses that are incurred during the process of setting up a company.

How do you calculate funding? ›

Funding = Net Position * Contract Face Value / Settlement Price * Funding Rate; Among them, the net position = the quantity of long positions (conts) – the quantity of short positions (conts).

How do you calculate funding requirements? ›

Funding requirement
  1. The model calculates the total funding requirement as being the capital expenditures + the interests from previously drawn debt.
  2. Based on a specified debt-equity ratio (70-30 for example), the model calculates how much debt is needed and how much equity is needed.

How do I seed my startup money? ›

How to get pre-seed funding
  1. Step 1: Build your pitch deck. You still need a pitch deck to begin raising capital even at this early stage. ...
  2. Step 2: Make an investor list. Not every investor will provide funding for pre-seed startups. ...
  3. Step 3: Present to investors. ...
  4. Step 4: Negotiate for success.
17 Mar 2022

Where do startup costs go on a balance sheet? ›

Where do startup costs go on a balance sheet? These costs would normally appear as either capital or retained earnings in the equity section of your balance sheet, depending upon whether you're operating as a small business or a corporation.

Do you include startup costs in income statement? ›

A startup's income statement reports a company's revenues, expenses, profits, losses, and net income over a specific period. To drill down deeper, an income statement identifies the costs a startup incurs to earn revenue and make a profit, showing granular detail of money coming in and money going out.

Which of the following expenses do not qualify as startup costs? ›

Start-up costs do not include deductible interest, taxes, or research and experimental costs.

What are the 5 ways to reduce small business startup costs and give examples of how your business will reduce startup costs? ›

Keeping costs low during the first years of business is essential for long-term success.
Ways to reduce business costs
  • Outsource tasks. ...
  • Market with social media. ...
  • Go paperless. ...
  • Use small business discounts. ...
  • Power down. ...
  • Review your vendor terms. ...
  • Buy used equipment.

What are startup assets? ›

Startup assets

These are costs associated with long-term assets purchased in order to start your business. While cash in the bank is the most basic startup asset (and we'll talk more about that later) there are some other common assets you may need to invest in: Starting inventory. Computers or other tech equipment.

How will an entrepreneur identify the start up cost and capital? ›

Create a list of business expenses and assets that your startup will need and break down how much each one will cost. From there, you can estimate your company's expected profits and do a break-even analysis to determine how long it should take for your company to become profitable.

How are startup costs capitalized? ›

Start-up costs can be capitalized and amortized if they meet both of the following tests: You could deduct the costs if you paid or incurred them to operate an existing active trade or business (in the same field), and; You pay or incur the costs before the day your active trade or business begins.

What can you write-off when you start a new business? ›

The top small business tax deductions include:
  • Business Meals.
  • Work-Related Travel Expenses.
  • Work-Related Car Use.
  • Business Insurance.
  • Home Office Expenses.
  • Office Supplies.
  • Phone and Internet Expenses.
  • Business Interest and Bank Fees.
9 Jun 2022

Is a cell phone bill a startup expense? ›

Cellphones have become just as vital to business as a land line, which makes cellphone use a legitimate, deductible business expense.

How do you prepare a budget sample? ›

The following steps can help you create a budget.
  1. Step 1: Calculate your net income. The foundation of an effective budget is your net income. ...
  2. Step 2: Track your spending. ...
  3. Step 3: Set realistic goals. ...
  4. Step 4: Make a plan. ...
  5. Step 5: Adjust your spending to stay on budget. ...
  6. Step 6: Review your budget regularly.

What are the 3 types of budgets? ›

The three types of annual Government budgets based on estimates are Surplus Budget, Balanced Budget, and Deficit Budget.

What does a good budget look like? ›

Setting budget percentages

That rule suggests you should spend 50% of your after-tax pay on needs, 30% on wants, and 20% on savings and paying off debt. While this may work for some, it's often better to start with a more detailed categorizing of expenses to get a better handle on your spending.

What's the 50 30 20 budget rule? ›

Key Takeaways. The rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must-have or must-do. The remaining half should be split up between 20% savings and debt repayment and 30% to everything else that you might want.

How much should my budget be? ›

Ideally, you should budget about 7% of your take-home pay for household expenses, but you may need to budget as high as 10%, depending on where you live and how big your household is. Need to reduce your household expenses?

How do you calculate cost? ›

The most common way to estimate costs is to make a list of items you need and add up their costs. Make sure you include all applicable costs, such as equipment and parts, materials and supplies, labor, financing, fees and licensing, transportation, and acquisition costs for land or facilities.

How do you calculate cost estimate? ›

The goal of each cost estimation method is to estimate fixed and variable costs and to describe this estimate in the form of Y = f + vX. That is, Total mixed cost = Total fixed cost + (Unit variable cost × Number of units).

Which cost method is most accurate? ›

An analytic estimate (also called bottom-up estimating) is one of the most accurate cost estimation techniques—but it can also be time-intensive. Bottom-up estimating breaks the project down into smaller parts and then creates cost estimates for those variables.

What is a business worth calculator? ›

A business valuation calculator helps buyers and sellers determine a rough estimate of a business's value. Two of the most common business valuation formulas begin with either annual sales or annual profits (also known as seller discretionary earnings), multiplied by an industry multiple.

What is the formula to value a business? ›

When valuing a business, you can use this equation: Value = Earnings after tax × P/E ratio. Once you've decided on the appropriate P/E ratio to use, you multiply the business's most recent profits after tax by this figure.

How many times profit is a business worth? ›

In most cases, people can determine their online business value by multiplying their average monthly net profit by 36x – 60x. For example, If a business generates a rolling twelve-month average net profit of $35,000, then this business would be valued at $1.26M on the low end and $2.27M on the high end.

What are the five cost concepts? ›

Besides the concept of opportunity cost, there are several other concepts of cost namely fixed costs, explicit costs, social costs, implicit costs, social costs, and replacement costs.

What are the 2 main type of cost? ›

Fixed and Variable Costs

The two basic types of costs incurred by businesses are fixed and variable. Fixed costs do not vary with output, while variable costs do. Fixed costs are sometimes called overhead costs. They are incurred whether a firm manufactures 100 widgets or 1,000 widgets.

What are costing techniques? ›

Costing techniques are the approaches or principles used to appropriately present cost data and statement to the management for evaluation and/or decision making. The three common costing techniques are; Absorption costing. Marginal costing. Budgetary control costing.

What are considered startup costs IRS? ›

Start-up costs include amounts paid or incurred in connection with an existing activity engaged in for profit, and to produce income in anticipation of the activity becoming an active trade or business.

Can you deduct start-up costs with no income? ›

You can either deduct or amortize start-up expenses once your business begins rather than filing business taxes with no income. If you were actively engaged in your trade or business but didn't receive income, then you should file and claim your expenses.

How do you calculate startup equity? ›

To calculate percentage ownership, take the number of shares you were offered and divide by the total number of fully diluted shares outstanding. You can find your equity information in your offer letter, or in the equity management platform your company uses (like Carta, for example).

How do you calculate fixed costs? ›

How to Calculate Fixed Cost
  1. Fixed costs = Total production costs — (Variable cost per unit * Number of units produced)
  2. $4,000 total production costs — ($3 * 1,000 tacos) = $1,000 fixed cost.
  3. Average fixed cost = Total fixed cost / Total number of units produced.

What can I write off when starting a business? ›

These include, but are not limited to, the cost of starting a business, including legal and accounting fees, and advertising costs. It also includes the cost of items such as fuel for the company vehicle, office supplies, and food for employees, as well as taxes on company property.

How much business expenses can you write off? ›

In 2021, you can deduct up to $5,000 in business start-up expenses and another $5,000 in organizational expenses in the year you begin business. Additional expenses must be amortized over 15 years.

How do I deduct business start-up costs from personal income? ›

Startup costs can be deducted on your income tax return for the tax year in which your business is up and running and earning income. You can deduct up to $5,000 of business start-up costs and up to $5,000 of organizational costs, but those deductions are reduced by the amount that costs exceed $50,000.

What if my business expenses exceed my income? ›

If your business expense deductions for a year are more than your income for that you, you may have a net operating loss (NOL). The way you determine and deal with an NOL depends on your business type. You take a net operating loss on your personal tax return if you are: A sole proprietor.

How far back can I claim startup costs? ›

If your startup expenditures actually result in an up-and-running business, you can: Deduct a portion of the costs in the first year; and. Amortize the remaining costs (that is, deduct them in equal installments) over a period of 180 months, beginning with the month in which your business opens.

Do I need receipts for all business expenses? ›

What is a business tax receipt? If you plan to include business expenses as deductions on your tax return, the IRS requires you to keep supporting documentation that shows what you bought, how much you paid, and when you bought it.

Is 1% equity in a startup good? ›

Q: Is 1% the standard equity offer? 1% may make sense for an employee joining after a Series A financing, but do not make the mistake of thinking that an early-stage employee is the same as a post-Series A employee. First, your ownership percentage will be significantly diluted at the Series A financing.

How much equity should a CEO get in a startup? ›

Startup financial advisor David Ehrenberg suggests that 5 to 10 percent is a fair equity stake for CEOs who join the company later. Research by SaaStr backs up this suggestion. The average founder/CEO holds roughly 14 percent equity at the company's IPO, while an outside CEO holds an average of 6 to 8 percent.

How much equity should I give founders? ›

The short answer to "how much equity should a founder keep" is founders should keep at least 50% equity in a startup for as long as possible, while investors get between 20 and 30%. There should also be a 10 to 20% portion set aside for employee stock options and, in some cases, about 5% left in a reserve pool.

What is the formula for cost? ›

The formula to calculate total cost is the following: TC (total cost) = TFC (total fixed cost) + TVC (total variable cost).

How is average cost calculated? ›

How Do You Calculate the Average Cost? Average total cost is calculated by dividing the total cost of production by the total number of units produced.

What is a good fixed cost ratio? ›

What's a Good Fixed Charge Coverage Ratio? As we mentioned above, a good fixed charge coverage ratio is equal to or greater than 1.25:1. A ratio that is 1:1 or lower is concerning, as it means your business is not making enough money to cover your fixed charges or is just scraping by.

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