A successful business venture is built on the foundation of Passion, clarity of vision and commitment, while its very existence depends on its financial health. A Business Insider infographic shows 82 percent of entrepreneurship failed in 2018 because of problems related to cash flow.
To ensure a healthy cash flow, entrepreneurship owners must be armed with the details of finances including start-up capital, working capital, cash in-flow, outflow and profit and loss forecast. Start-up costs are one of the key aspects that may be underestimated by many business owners. According to estimates, the start-up capital required on an average can range between $10,000 and $80,000.
What are the start-up costs?
Start-up costs relate to the expenses involved in setting up the business and managing the cash flow until the entrepreneurship becomes profitable. Although the exact costs depend on the nature, location and scale of business, the most common costs involve the following:
- Office space: If you are not operating from your own home, the rental costs of hiring an office space or industrial space can be high. As per an expert estimate, it can vary between $100 and $1,000 per month per employee.
- Equipment and inventory: Inventory and equipment costs pertain to retail, manufacturing, wholesale and distribution sectors. Designating between 17 to 25 per cent of the start-up funding to inventory may be necessary.
- Advertising and marketing: Marketing materials such as brochures, banners, signs, and business cards need to be factored in as part of start-up costs. Allocating 10 per cent of the budget to marketing may be essential.
- Incorporation and licenses: In most states, the incorporation fees are below $300 while licensing fee apply to service-based industries. For retail entrepreneurship, the costs related to obtaining sales tax permits have to be factored in.
- Payroll expenses: Payroll includes benefits, compensations, stipends and overtime pay which may come up to 25 to 50 percent of the total budget.
- Utilities: The utility costs involve gas, water, electricity, internet, and phone bills. As per an expert estimate, per square foot of space, the cost can be $2 if HVAC systems are not used.
- Website: While there are free and basic websites, having a professional website is essential to draw traffic and provide your customers with the information they need. Most website services can cost between $5 and $25 per month.
- Insurance: The kind of insurance your business needs depends on the nature of the business, its size, number of employees and risk factors involved. For service-based business owners, professional liability insurance is very important, given the protection it offers against expensive malpractice or negligence lawsuits. While a study found that small businesses spend on an average $1281 annually for insurance, it is a worthwhile investment considering the huge amount of legal expenses saved in the event of a claim. Check here to find out more about professional liability insurance.
In the initial stages of business operation, particularly, start-up costs need to be carefully planned and meticulously accounted for. The initial stages of the business is also a vulnerable time when the business owner is exposed to a range of risks including professional negligence, mistakes, breach of contract, delays or other service-related errors. Apart from researching on start-up costs and arranging for adequate finance, business owners should consider obtaining professional liability insurance to protect themselves against service-related risks.