How to Calculate Start-Up Costs

The Wall Street Journal - wsj.com
OCTOBER 5, 2009, 10:10 A.M. ET
How to Calculate Start-Up Costs

By COLLEEN DEBAISE
Adapted from the upcoming book THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press, Dec. 29, 2009).

Got a pen handy? To best estimate your start-up costs, you'll need to make a list— and the more detailed the better. A smart way to start is to brainstorm everything you'll need, from tangible goods (such as inventory, equipment and fixtures) to professional services (such as remodeling, advertising and legal work). Then, start calculating how much you'll need to pay for all those goods and services.

Some of the expenses incurred during the start-up phase will be one-time costs, such as the fee for printing up your brochures, creating your LLC or acquiring a permit, while others will be ongoing, such as rent, insurance or employees' salaries. In general, it's best to use a two-step process. First, come up with an estimate of one-time costs needed to get your doors open, and then develop an operating budget for the first six months or even the first year of the business. Check out the Better Business Bureau's sample worksheet here.

The categories listed below will aid you in completing your list of costs for opening and operating a small business:

Location. Think about how much you'll need to pay for rent, to make improvements to the space or for full-scale renovations.

Inventory. Figure out the cost of raw materials, plus any production costs, or the wholesale prices of products you'll be selling. Calculate shipping and packaging costs, sales commissions and other costs related to the sale of your product.

Equipment. Add up how much it costs to buy or lease computers, copiers, telephones, heavy-duty machinery or other fixtures.

Employees. Calculate salaries and wages, plus benefits you would offer, and don't forget payroll-related taxes, overtime pay and workers' compensation.

Marketing. Figure out how much you'll pay for new stationery, marketing materials, advertising campaigns, the sign above your door and meals or entertainment with clients.

Administrative and operational costs. Keep track of how much you'll need to pay for insurance (to protect against property damage, business interruption and floods) and office supplies. Don't forget utilities, a commonly overlooked expense, and other charges, such as phone and Internet service, cleaning and property maintenance.

Professional fees and permits. Add up how much you'll pay for your attorney, accountant or other advisor or consultant. Factor in what you'll need to pay for permits or licenses related to your business.

If you're still having trouble figuring out how much money you need, do research on other companies in your industry and region of the country. Talk to other business owners about how they figured out start-up costs— and ask specifically about expenses they forgot. The SBA offers free counseling through its Small Business Development Centers and its affiliate, SCORE. You can also seek advice from an accountant or attorney accustomed to dealing with small businesses.

When in doubt about your projections, you should always err on the side of overestimating your up-front investment cost and underestimating sales. Eric van Merkensteijn, a University of Pennsylvania business professor who left academia in the late 1990s to open a restaurant in Philadelphia, offers this advice: Figure out your start-up costs, then double that number. Then double it again. Only then will you have a realistic number, says the professor, who closed the business in 2004 and returned to campus.