Essential Costs When Starting a Business

8 Essential Costs When Starting a Business

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When starting a business, there are many things to consider. There are costs for all kinds of items that are essential when launching a new business. Understanding what the core costs are, what they total, and their role in the business is important.

As a new business owner, here are 8 essential costs to consider.

1. Equipment Purchases

No matter what business you plan to launch, you will need equipment. Even online-only businesses will need equipment such as computers or laptops, printers and shipping scales.

Some businesses have much more intense equipment requirements, such as machinery to process materials and produce goods. Such businesses may have equipment requirements that cost tens of thousands of dollars.

Equipment will be of two primary types. On the one hand, you’ll need permanent equipment that is used repeatedly. In addition, you’ll need other equipment that is designed to last a shorter lifespan. These supplies will need to be replenished repeatedly during the course of running your business.

Consider that if you want to start a moving business, you’ll need a truck, extensive and possibly specialized tools and furniture pads. If you’re opening a restaurant, you’ll need pots, pans, utensils, ovens, stoves, dishwasher, refrigerator and freezer and storage equipment.

Generally, startup equipment costs can run from $10,000 to $150,000.

2. Insurance Coverage

Every business should ensure it has the right insurance that protects itself, its employees and its customers. There are may different types of insurance to consider.

The most common is a general liability insurance policy, which covers the business against claims of property damage or bodily injury. This insurance protects the business if someone’s property is damaged during a visit or someone is hurt.

Other policy types include:

  • Commercial property insurance, which protects the business location and equipment
  • Business interruption insurance, which covers lost income due to a temporary shutdown due to a natural disaster, fire or other incidents
  • Business owner insurance, which combines general liability, commercial property and business interruption coverage into one policy
  • Errors and omission insurance, which is often used by professional services firms and covers mistakes made in your work
  • Cyber liability insurance, which protects the business from losses due to cyberattacks or data losses
  • Workers compensation insurance, which is required if you have one or more employees. This protection covers work-related injuries and illnesses and is mandatory in most states
  • Product liability insurance, which protects you when your products cause property damage or injuries

3. Incorporation and Registration

One of the initial tasks you need to complete as a business owner is to incorporate and register your business. This process establishes the business structure under which you want to incorporate. There are many different business structure types to consider, each with its own advantages and disadvantages, especially related to taxes and liability.

There are four common business types:

  • Sole proprietorship, the simplest type, with profits and losses passing through to the owner’s personal income taxes. There are no liability protections to running a sole proprietorship but it requires no formal paperwork to establish
  • Partnership, where two or more people own a business. Like a sole proprietorship, profits and losses are passed on to the partners, who have personal liability for any actions against the business
  • Corporation, which establishes a legal entity that is separate from its owners or shareholders. There are more compliance and tax regulations in play. For example, there are requirements for annual meetings, notetaking and boards.
  • Limited Liability Company (LLC), which is a very option for small businesses. When starting an LLC, owners have personal liability protection and tax advantages

Registering a business depends on the jurisdiction and the business type selected. For several hundred dollars, you can register business and cover the filing fees and other costs, that can vary based on the state where your business operates.

Many organizations choose to use a partner to manage the paperwork and ongoing annual requirements of whichever structure you choose.

In addition to the business filing fees, your business will need to pay various federal, state and local fees related to launching your business. These will vary based on the type of business you run. In some sectors, you will also need to acquire licenses and permits to operate legally, such as sales tax licenses and building occupancy permits.

4. Inventory

Inventory costs will vary based on the business type. Retail, wholesale, distribution and manufacturing companies in particular will need to source, acquire and store goods made available for purchase.

The costs can be significant as a percentage of your operating budget, upwards of 17 percent to 35 percent.

Initially, there can be challenges related to knowing where to source inventory and, more basically, what to sell. There is some trial and error associated with these initial months of a business, as owners need to determine which products to sell.

Your business must also determine how much product to keep onsite to sell and ship.

Having too much on hand risks damage and spoilage loss. Not having enough on hand means not being able to fulfill orders quickly and losing customers unwilling to wait for items on back order. For seasonal businesses, this inventory balancing act can be challenging.

New businesses may want to consider carrying more inventory in order to attract customers and boost revenue. Over time, as you determine what sells and how quickly, you can adjust on-hand inventory accordingly.

5. Marketing, Advertising and Website

When you decide to launch a business, you’ll need to let people know about it. That’s where marketing, advertising and website costs come in. Each of these costs is critical to raising awareness and building an audience for your company.

Marketing and advertising expenses should take anywhere from 7 percent to 10 percent of your revenue. Depending on your business, you’ll want to determine the channels you use to invest in ads. There are traditional media, such as television, radio, newspapers, magazines and billboards.

In today’s day and age though, you’ll also want to have a strong internet advertising presence. Google, Facebook, Instagram, Twitter and other social platforms and search engines all offer paid advertising.

The power of online advertising is the ability to customize for the demographics you are targeting. You can fine-tune your advertising spend to place ads in front of viewers who are most likely to want your products or services.

Another element of online marketing and advertising is search engine optimization (SEO). An SEO strategy creates content – blogs, infographics, videos and other material – that is relevant to search queries. With more pertinent content, your website will rank higher in search results, meaning you’re likely to have more clicks.

Developing a website is integral for businesses whether they sell online or not. Consumers today use the web to find businesses, answer questions and research companies. Having an effective website that’s relevant, optimized and regularly updated is essential. Hiring a professional website designer can cost up to $10,000 but is a wise investment.

6. Payroll and Benefits

If you need to hire employees, you’ll be paying salaries and wages. In addition, you’ll need to pay the employer portion of federal programs such as Social Security.

In addition to salaries and wages, you may choose to offer incentives, whether commissions on company sales or bonuses paid out regularly or annually.  If you pay people on an hourly basis, you will need to pay overtime for hours in excess of 40 per week.

Employees today also expect to have various employee benefits, including paid time off for sick leave or vacation, health and other types of insurance, holidays and other perks. Benefits, combined with compensation, are a major factor in the hiring process.

7. Professional Services and Consultants

No small business owner can figure everything out themselves. They often need to turn to professional experts to address key areas of the planning and operation of the business.

Hiring or retaining an attorney is one of the most common professional services necessary. An attorney can help develop and execute legal documents, create cand review contracts and assess materials ranging from lease agreements to partnerships.

Having an accountant at hand is another important role to fulfill. Accountants can help assess the financial situation of your organization, recommend changes to business operations, where to invest capital and profits and when to make important financial changes.

When needed, business consultants can provide deep insights into various aspects of the business and how to improve operations, revenue and efficiency.

These services are vital but do not come cheap. Most professionals charge on an hourly basis with fees that can range from $200 to $500 per hour.

8. Office Space

If you have a physical location, you’ll need to pay rent for office space. Depending on your location, office space can vary from several hundred to several thousand dollars every month. You’ll also need to pay for utilities, office furnishings, signage and occupancy permits.

Starting a business is an exciting time for any business owner. Knowing the costs and their importance can help you plan for and invest in your company’s success.

Also Read: 4 Funding Options to Consider When Starting a Small Business

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