You’ve probably heard the old “you need to spend money to make money” cliché.
But let’s face it: When you’re starting a business, the mere idea of spending money makes your mouth dry and your palms clammy.
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How do you know if you’ll be able to get your small business off the ground? How can you justify startup expenses when you aren’t earning any money yet? How are you supposed to know how to manage your business startup costs effectively? Shouldn’t you be pinching every last penny for at least the first year?
We get it. Spending money before you’ve earned any feels counterintuitive. However, there are certain non-negotiable organizational costs involved in getting your new business off the ground.
Which ones are worth investing in and which ones should you put on the back burner? We’re breaking down both the essential and the unnecessary startup expenses for you here, so you can make the most of every single dollar you invest in your small business.
5 essential startup expenses
Let’s start with the must-haves. These are organizational expenses that almost every new small business will need to be prepared to invest in. These costs usually fall into two broad categories:
- Operating expense: Regular day-to-day expenses required for running your business, such as insurance, payroll, rent, office supplies, and more.
- Capital expense: Bigger purchases or investments that become assets that benefit the business, such as equipment, a building, or a vehicle.
Those two types of expenses are treated differently for tax purposes, and you’ll likely have some startup expenses in both buckets. But don’t wave goodbye to your hard-earned money quite yet, as we’re also sharing some tips and advice to help you minimize your startup costs as much as possible.
1. Business plan
Typical cost range: $1,000-$20,000
Starting a business without a plan is like trying to build a house without a blueprint.
You need to have a grasp on what you’re working toward. In fact, 69% of small business owners in one QuickBooks survey recommend writing a business plan as the best first step when starting a business.
What’s a business plan? It’s a formal document that will cover the basics of your business, such as:
- Description of your company, products, and services
- Market research to identify your ideal customer and potential opportunities
- Competitive analysis to understand what similar companies you’re up against
- Marketing and sales strategies to grow your business
- Business financials and projections
It sounds like a lot, and it can be. Your business plan will require a significant investment in time, as well as in money to get the information, resources, and potentially even the help you need. But rest assured that it’s an expense that’s more than worth it.
How to keep your costs low:
- Find a business plan template that can help you at least get the skeleton of your business plan sketched out.
- Search for a mentor through the Small Business Administration’s SCORE program, which can partner you with an expert to help you on your business plan for free.
2. Business permits, licenses, and insurance
Typical cost range: $500-$30,000
Groan. Sigh. Eye roll. Things like permits and insurance policies definitely aren’t what many entrepreneurs’ dreams are made of. However, they’re crucial for ensuring your business is compliant and protected in case of unforeseen circumstances.
The vast majority of businesses (unless they’re operating as sole proprietors) will need to pay incorporation fees or filing fees to establish their official business entity with their state. These fees can range from $50 to $500 depending on your state, and the possible business entities you could establish include a:
- Limited liability company (LLC)
Different states use different government offices for this filing process, including:
- Department of Financial Institutions
- Department of Revenue
- Secretary of State
Fortunately, a simple internet search for “establish a business in [state]” will help you figure out your best route, understand the cost, and locate the necessary forms.
With your business entity set to go, many businesses will also need to spend some money on the appropriate licenses and permits, such as a sales tax permit or occupational licenses. Exactly what you need will depend on your specific business and your state.
Finally, a business insurance policy will require an upfront investment but will also give you some much-needed peace of mind. Again, the type of policy you need will differ from business to business. Many business owners opt for a general liability policy, but others might need product liability insurance or even property insurance if they have a brick-and-mortar location.
How to keep your costs low:
- Do your research. You don’t need every type of permit, license, or insurance policy. Spend the time to find the right fit for your business so you can spend the money on what you actually need.
- This is another instance where a SCORE mentor can lend some knowledge and expertise.
Typical cost range: $1,000-$100,000
You’re the business owner, but chances are good that you can’t get everything done with your own two hands.
To get started, you’ll need to invest in the necessary equipment. That could be something as simple as a reliable internet connection for your consulting business to something more complex like an automatic vehicle lift for your repair shop.
Depending on the type of business you’re starting, equipment can range from a modest to a hefty expense. But remember, provided the equipment is something you’ll need for the duration of your business, it’s a worthwhile expense.
How to keep your costs low:
- Keep an eye out for used equipment, which is often available at a cheaper price and helps you avoid the pain of major depreciation. Sites like Craigslist or Facebook Marketplace could have options for you, but make sure to ask plenty of questions and request documentation if necessary to ensure the equipment functions appropriately.
- Be open to sharing equipment, such as baking your gluten-free granola bars in a commercial kitchen. Similarly, some business incubators provide specialized equipment, so it’s worth checking what’s available in your area.
4. Accounting and legal expertise
Typical cost range: $1,000-$10,000
There are plenty of daunting responsibilities that business owners find themselves facing, and things like taxes, bookkeeping, and legal issues are definitely on that list. Without the right professionals in your corner, it won’t be long before you find yourself tearing your hair out over complex jargon and regulations.
That’s exactly why finding and investing in a certified public accountant and credentialed attorney is a smart idea, even when you’re just getting started. While there is an upfront cost associated with these professionals, they can actually help you avoid other unnecessary costs like fines, penalties, and legal fees.
Even if you don’t have the means to pay qualified professionals right away, there are other steps you can take to get the right systems in place. For example, investing in accounting software like QuickBooks or asking an attorney to create a simple contract template that you can tweak can lay the right foundation without a huge price tag.
How to keep your costs low:
- Connect with other existing business owners to ask for recommendations about which accounting and legal experts they consulted with.
Typical cost range: $150-$5,000
When somebody first hears about your brand-new business, what do you think they’re going to do? They’re going to look you up online.
When they do, they should find your business website. This legitimizes your business, gives you complete control over the information that’s being shared, and can help you secure more customers.
Creating a website can feel like an expensive and overwhelming undertaking, but rest assured that your first business website doesn’t need to have all of the bells and whistles. A simple website that includes the following pages will more than suffice as you’re getting started:
- Products and services
That’s really all you need as a brand-new business. Once you get more established and comfortable with your cash flow, you can invest in a more advanced and heavily branded site.
How to keep your costs low:
- Use a drag-and-drop website builder like Squarespace. This type of platform makes it easy to create and customize a straightforward site with no design or development experience.
- Connect with a college in your area to see if any web design students are looking for experience. You could benefit from their expertise, support their learning, and get your website done at a reduced cost.
3 unnecessary startup expenses
When you’re a new entrepreneur who’s being extra mindful of your bottom line, not all startup costs are created equal. While the above are worthy investments, the business expenses in this category can be saved for later or skipped altogether.
1. Expensive branding and marketing
Marketing matters for all businesses, whether they’re brand new or have been around for decades. But here’s the thing you need to remember: You don’t have to have a flawless marketing plan right out of the gate.
Business ownership is a learning process, and you’ll uncover a lot about your value proposition, target audience, brand identity, and best-selling products or services as you get your feet wet.
So, resist the temptation to throw tons of dollars at a logo, paid ads, or pricey promotional materials right away and instead rely on social media and even word-of-mouth marketing to get some initial traction.
2. Large staff
Hiring is another one of those business expenses that can vary greatly depending on your business.
But, even so, it’s smart to be intentional about building your staff and avoid over-hiring immediately. The last thing you want is to end up with a huge team of employees without the ability to pay them.
As you get your business started, focus solely on your most pressing needs and hire to fill those. Keep in mind that doesn’t automatically mean you need a full-time or even part-time employee. You could outsource different tasks to freelancers or independent contractors to get the skills and expertise you need, without having to pay a consistent wage or benefits.
3. Travel and perks
Take a minute to think about some of the biggest, most successful companies today. We’re willing to bet tech giants like Amazon and Apple come to mind, and it’s important to remember that they had humble beginnings; in fact, they were both started in garages.
They’re proof that entrepreneurship (particularly when you’re in the lean startup phase) takes a lot of grit but not a whole lot of glamour.
That means catered lunches, pricey business travel, parties and celebrations, and other nice-to-have perks aren’t a priority for you at the start. Stay focused on what you absolutely need to spend money on, rather than getting caught up with fun yet frivolous expenses. You can invest in those when you have more stable footing and better cash flow.
Keeping track of your startup expenses
We hate to sound like a broken record, but we’ll say this one more time: justifiable startup costs will differ from business to business.
For example, a brick-and-mortar retail store that needs inventory, several part-time sales associates, and a physical location will have much higher new business expenses than a single-member LLC that offers custom calligraphy services. Your business might need office space, while another business can operate from home for the foreseeable future.
So, there aren’t necessary right and wrong startup costs that apply across the board, and ultimately, you as the business owner are the one who’s best equipped to determine what’s worth investing in.
Regardless of the specific expenses on your business balance sheet or profit and loss statement, there’s one best practice you’ll want to keep in mind when making purchases for your business: track your expenses and keep all of your receipts (this is when accounting software can be especially beneficial). You’ll need those records for tax purposes.
Many of your expenses are what’s known as a write-off or a business deduction. This means that deductible expenses are subtracted from your business’s overall revenue. That lowers your taxable income which, in turn, can reduce the amount you need to pay in taxes.
At tax time when you submit your tax return, you’ll list your business income and expenses for that tax year on an Internal Revenue Service (IRS) worksheet called a Schedule C.
Wondering whether or not you can deduct one of your expenses? The IRS’ general rule is that a business expense needs to be both ordinary and necessary, but they also have a helpful guide for figuring out what you can write off.
Plan your expenses and start smart
When you’re starting a business, your goal seems pretty clear: You want to make money. After all, being profitable is ultimately the hallmark of a successful company.
To make that happen, you often need to invest some money to get up and running. But that doesn’t mean you should spend your dollars with reckless abandon.
Instead, it’s smart to understand what you need, estimate how much that will cost, and create a plan for how you’ll cover those expenses. That will help you make smart decisions and get your business moving in the right direction without feeling like you need to search your couch cushions for spare change.
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