It takes a lot of time -- and money -- to get a new small business up and running. Make sure you don't overlook any of these expenses, so you can improve your changes for success. It is important to determine how much it will cost you to open your doors for business.
Startup costs can be broken into the following categories:
- hiring professionals,
- getting insurance,
- planning advertising and marketing,
- hiring employees,
- planning the physical space,
- remembering special considerations for retail businesses,
- accounting for miscellaneous costs and
- raising money.
The first time you go through the costs to start up your new business, you don't need to be particularly precise--a rough idea is sufficient. To determine how much you'll need for the first few months of operation, see working capital needs.
In addition, before diving in, you may want to look in the Business Tools section at the initial cash requirement worksheet for a new business. The worksheet is set up to forecast cash requirements for the start up of a new business. The worksheet is formatted with most of the cash requirement categories. All you have to do is put in your numbers. Once you've downloaded the worksheet, you can modify it to fit your own needs.
Hiring professionals to keep your business on track
Among the professionals you may need to work with are a lawyer, an accountant, and, in some cases, a marketing or business consultant. You might as well think of them as being part of your business family because they'll play an extremely important role in your business's success or failure.
As you work through these topics, don't forget that your accountant can be a great source of information with regards to start-up costs. If your accountant has small business experience, he or she should be able to tell you whether your estimates are on target.
The general questions to ask yourself to determine if you should hire a professional are:
- Do they have expertise you need but personally lack?
- Do you have the expertise, but they can do what they do cheaper than you can do it?
Suppose you know how to prepare your own financial statements and tax forms. If, however, you lose business because you're too busy doing your own accounting work, you'll have to determine whether the lost business income is greater than the cost of hiring an accountant. If it is, you should hire the accountant.
The two professionals you'll almost certainly need to work with are an accountant and an attorney. Let's take a quick look at the tasks they'll perform for you:
- Accountant — can set up your bookkeeping; can set up your system for handling the cash you receive; can do your taxes and advise you on how to operate your business to reduce your taxes; can provide financial planning advice.
- Attorney— can help you choose the form of business you need and can help you prepare the necessary paperwork; can help you make sure you've complied with all local laws; can help you draft contracts and leases; can provide legal advice for many of your business decisions; can defend you if you get sued and can advise you if you are considering legal action against someone else.
To find out how much a lawyer and an accountant will cost, ask your friends and business associates or call some lawyers and accountants and ask them. In most cases, a lawyer or an accountant will not charge you for an initial visit, so you can do some free comparison shopping. Make sure you call and confirm that the initial visit is free before you go.
Once you've chosen a lawyer, he or she may ask you to pay a retainer fee, which is a lump sum that you pay up front and then draw against every time the lawyer advises you. This practice is becoming increasingly common because lawyers are growing wary of providing advice on credit to businesses that may fail before the bills are paid. Some lawyers may ask you for a retainer of as much as $2,000 or $3,000. Ask around to find what others are paying.
Don't be scared off by a lawyer who wants a retainer. In some ways, it's a good method for budgeting your legal costs since you know up front how much you'll be spending.
Getting insurance protects you from risk
As a new business owner, your insurance needs will depend upon the type of business you run. For example, a self-employed computer consultant who operates out of her home will have insurance needs that are significantly different than a 10-employee company that manufactures explosives. The cost of insurance, therefore, will also depend upon the type of business you operate.
If you don't have an insurance agent, ask your small business friends and associates who they use. Another source that may be more focused, more experienced, and less expensive is your industry association. Industry associations usually provide a large, predictable, homogenous pool for underwriters, which generates lower rates. They can often provide one-stop shopping for both business and personal insurance needs (e.g., liability, property and contents, life, medical, etc.).
You can sometimes save money by having all of your insurance needs met by one company. Thus, when comparing prices, don't look at just one type of insurance to make your decision. Look instead at whether you can save money by having a single company handle all of your needs.
One good way to do this is by contacting an independent insurance agent who can do the shopping for you.
Obtain bids for a complete insurance package from several different insurance agents and companies. When comparing insurance proposals, make sure you are not inadvertently comparing apples and oranges. Make sure the packages have very similar types and amounts of coverage. Below are brief descriptions of the various types of insurance that your new business may need. Remember, no two businesses are alike. Some businesses may require additional types of insurance and some may require only a few of these mentioned.
- Property insurance— this insurance will cover losses arising from physical damage or loss of use of the property or theft losses. Remember to insure against the losses of the contents of your business, too. It is very possible to have a larger investment in machinery and equipment, inventory, and business records than the actual business building.
- Business interruption insurance— this type of insurance will pay your bills while you are out of operation for a covered loss, such as a fire. Just because your business is shut down does not mean that your bills will stop. This type of insurance can also provide your business with the lost profit protection, although such coverage is expensive.
- Liability insurance— this type of insurance protects you if you are sued. It will pay judgments against you up to the policy limits, as well as the legal fees you incur in defending yourself. Some small businesses, such as doctors and lawyers, will also need to carry professional liability coverage, which protects the insured against lawsuits that result from professional error.
- Key person insurance— this type of insurance includes coverage for the owner's or manager's death or disability. It is meant to get a company through the tough times following the loss of a key person and includes a buyout of the deceased owner's interest at the time of death.
- Workers' compensation insurance— this type of coverage is necessary for those small businesses that have employees. It varies by state and employee job duty classification. The cost will vary based upon the worker classification.
- Health insurance— this type of insurance pays the medical bills for covered illnesses and injuries. Buying insurance through your business can be cheaper than buying an individual policy for yourself. Because of the high costs, most small employers don't offer health insurance as an employee benefit.
- Life and disability insurance— these policies provide covered individuals or their families with income in the event of death (life insurance) or a disability not related to work (disability insurance). These types of insurance are relatively inexpensive.
Planning your insurance needs is just as important as any of the other planning you will do or have done for your new business. It's possible to reduce your overall insurance costs by instituting certain safety procedures. Ask your insurance agent what steps you can take to reduce your costs.
You should reevaluate your total insurance package on a regular basis. Are there additional risks that you want or need to insure against? Is the amount of insurance coverage high enough or is it too high? When you reevaluate your insurance, make sure you are insuring only assets that you still own and that some assets are not uninsured.
For a more detailed explanation of all your business insurance options, see our discussion of insuring your office and equipment.