Start-up expenses, the one-time expenses you need to incur before you make your first sale, are one type of cost you’ll need to estimate when starting a small business.
What are start-up expenses?
Start-up expenses are made up of one-time capital expenses and monthly operating expenses. One-time capital costs might include purchase of initial inventory, purchase of equipment or furniture, improvements to your physical space, development of a website and deposits and fees.
Your start-up monthly operating expense estimate depends on your guess of how long you’ll be “operating” your business without any money coming in the door — we call that “Months to First Sale.” Imagine the T-minus 60 seconds countdown in a space shuttle launch.
The average number of months it takes to plan and start a small business is six, but it really depends on your industry. You know we love research, so we’ll say it again: the best way to find out how long you’ll have to pay your bills without any customers coming in the door is to ask a member of your industry, or someone who operates a business like the one you’re planning to run.
Start-up costs for a home-based service business are usually much less than those for a manufacturing business since you usually don’t have to worry as much about workspace or buying enough equipment to create a product.
Find the type of start-up costs that work best for your business
How you decide to pay will influence your one-time start-up expenses, because the objective is to estimate the amount of cash you’ll need to get to your grand opening. For example, if you need a $30,000 delivery van, you can buy it outright, which means you’ll need $30,000 in cash.
You can also lease it, which means borrowing money to pay for it, which means a smaller initial sum of cash for the deposit or loan down payment. This lets you pay over time when your cash flow is likely to be stronger. However, you’ll always end up paying more in total because of interest expenses and built-in fees associated with leasing.
Carefully consider your start-up needs, and be honest about how much your start-up costs will be. It’s better to make a mistake on paper than on opening day!