Before you begin to raise capital for your new venture, estimating your expenses is key, but many entrepreneurs aren’t sure where to start. If your goal is raising startup capital, you owe it to your business – and your potential investors – to know exactly how that money will be spent.
While every startup is different, most early stage businesses share similar needs. These generally break down into two broad categories: one-time costs and ongoing expenses.
One-time costs take on many forms, and the specifics will vary depending on the nature of the business. From a financial perspective, however, they all work more-or-less the same way. These are up-front investments in your startup, and you pay for them once.
There are six general categories of one-time costs:
- Formation expenses: These are legal and organizational costs of putting together the business. Filing fees for incorporation and state or national licenses for certain kinds of business are good examples of one-time costs. There are also legal expenses for the agreements between founders and major founding partners, all of which should be hammered out during the formation.
- Brand identity development: Every business needs an identity. This is how your business looks and feels to the world, so it should be given due consideration. These expenses include website, logo, and brand design, business cards, contracting a digital marketing strategist to help outline your social media presence, signage, trade show branding, and possibly uniforms.
- Facilities and equipment: Unless your company is strictly virtual, you’re going to need a place to do business. This means finding a storefront, manufacturing facility, or multiple facilities if that’s what your business requires. One-time costs associated with your real estate likely mean deposits, remodels, or upgrades. All of your utilities will also have deposits or set-up fees, and you’ll have expenses for office furniture, specialized equipment, and delivery vehicles.
- Computers and communication: There are very few businesses that don’t require decent computers, phones, and printers to use – consider the cost of your technology. Are dedicated servers, projectors, and even tablets for sales calls required? Software, from industry-specific tools to more common programs for things like payroll and accounting, might need to be factored in as well. Retailers will need point-of-sale (POS) equipment or software, including the ability to take credit card payments.
- Initial inventory: If you’re manufacturing or producing something, you’re going to need raw materials to produce it. You might also need molds for injection molding, which tend to be very expensive on the front end. You will also need packaging, whether it’s simply to ship bulk goods or something more visually attractive for retail use (don’t forget about initial design costs if you’re looking at branding that beautiful packaging!).
- Product and service development: These are all the one-time costs associated with getting your products or services ready to hit the market. Those costs can be everything from design and engineering to prototyping and coding. Intellectual property requirements, like trademarks and patents, also fall into this category.
Ongoing expenses are simply the costs of running your business. They can also be deceptive, as some of the smaller expenses can be easy to forget about or overlook. Add them together as a monthly expense, and even those seemingly negligible expenses can make a huge dent on your profits.
- Rent or mortgage: As well as any other facilities costs.
- Payroll: Both for employees and contractors.
- Taxes: Income tax, as well as use and sales tax.
- Insurance: General liability, as well as workman’s comp, auto insurance, and errors and omissions (E&O).
- Professional fees: Lawyer and CPA fees are common examples.
- Marketing and advertising: From AdWords and display ads to things like social media expenses.
- Sales: Everything from travel reimbursements to brochures.
- Loan payments: Usually bank loans, but this includes private loans as well.
- Utilities: Internet, electricity, heat, and water & sewage
- Office supplies: From copier toner to paper clips.
- Owner’s salary: This is a big one, because the owner needs to make money as well. It’s often handled separately from payroll.
By breaking down your business expenses using these categories, it should be much easier to create a clear picture of your startup capital needs.
If you haven’t already done so, take the time to separate your budget spreadsheets into one-time costs and ongoing expenses. This will give you an idea of the amount of capital you need to start your business, and how much money you need to eventually bring in on a monthly basis to break even. Knowledge is power!