If you have a business idea, you’ve probably envisioned being your own boss and making a profit. You also need to think about the money it will take to turn your idea into reality. How much does it cost to start a business?
Unfortunately, there’s no easy answer for the cost of a business. In 2009, the Kauffman Foundation estimated that the average startup costs $30,000. But, every business is different. Some startups require a lot of funding while others launch with a few thousand dollars of small business funding.
As an aspiring business owner, you need to understand your business’s specific needs. Is bootstrapping your business possible, or do you need to consider other small business funding options? Before jumping into entrepreneurship, estimate the cost to launch your startup.
What are startup costs?
When you’re starting a business, the lines that separate where your money is going can blur. You need to separate startup costs from other transactions. Knowing the cost to start a business helps you claim small business tax deductions and manage financial records.
Startup expenses are the costs you incur before making money from your business. Once your business earns revenue, the expenses are losses instead of startup costs. Most new businesses fail because they run out of money before reaching the break-even point, so plan carefully.
Expenses vs. capital expenditures
Business startup costs can be separated into two categories: expenses and capital expenditures. Each type of cost affects your business’s finances differently.
Startup expenses are costs that go into preparing your business. Often, these business expenses are recurring. Here are some common examples of startup expenses:
- Marketing materials
- Professional fees
- Business registration
Most startup costs (but not all) are tax deductible business expenses. By deducting expenses, you lower your taxable income, which reduces your tax liability. Startup costs are deductible up to $5,000 in the first year of doing business.
If you spend more than $5,000 on your startup, you can amortize the remaining amount. For this amortization expense, you deduct equal amounts of the business startup costs over a period of 180 months.
To deduct startup expenses, you must actually start a business. If you spend money preparing to launch but don’t open a business, you can’t deduct the expenses. The purchases are then considered personal expenses, which are non-deductible.
Capital expenditures are one-time purchases made to buy assets. Here are some common examples of capital expenditures:
- Security deposits
Usually, you can’t deduct capital expenditures on your tax return. But, you can depreciate the cost of capital expenditures. With depreciation, you spread the cost of the asset over a set number of years. Depending on the asset, there are different ways to depreciate costs. Look at the IRS website for depreciation instructions.
How much does it cost to start a business?
Assess your startup cost needs ahead of time to improve your chance of success. Estimating startup costs helps you choose a financing option, understand your break-even point, and manage cash flow.
Make a list of the costs you expect to make for the startup. Separate the costs into categories, such as expenses vs. capital expenditures. Prioritize the costs to see which are essential and optional. Organizing your list of small business startup costs will help to keep your estimate accurate. If you need to adjust your business budget, you can go back to the list and make changes.
Decide if the startup costs are fixed or variable. Fixed costs recur periodically at the same amount, such as rent. Variable costs change with business operations. For example, the more products you sell, the more you pay for inventory.
Double-check that you’ve covered all your bases. You don’t want to underestimate the cost to start your business. Once you’re sure you’ve listed everything you need, assign a dollar amount to each item.
Add the amounts for a total of your startup costs. If the figure is outside of your spending limit, see if anything on the list can be removed or substituted.
Getting ready to start your business
Preparation is key when starting your own company. Before you open a business, take a look at what you have.
If you’re like most small business owners, you will invest personal assets into your startup. For example, you might use your bank account and line of credit to start your business. Make sure you have enough to start and won’t lose significant personal assets if you are unsuccessful.
Factor personal expenses into your startup cost calculation. You pay your rent or mortgage, utilities, and loan payments. You need to put gas in your car and buy food. Small business startup costs are an addition to your existing liabilities.
Estimating startup costs and setting aside funds will help you launch your business. You should have at least a few months’ operating costs set aside before you start your business. If you don’t have enough, pursue alternative financing options. You could apply for an SBA loan, open a business credit card, or ask family and friends.
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