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How to Estimate Starting Costs

How to Estimate Starting Costs

By Tim Berry, Guest Blogger
Published: January 6, 2017 Updated: February 1, 2017

“How much does it cost to start a business?” I get that question a lot, in my email stream; and I see it often on question-and-answer sites. The problem with answering this question is that starting costs depend entirely on what you want to do. Think of the difference between a simple food cart and a fancy New York restaurant. Everything is case specific.

The good news is that you can estimate your starting costs for that business you want to start. Depending on how much you know about your industry and business in general, it can be fairly easy. It takes three essential estimates:

  1. Expenses you’ll incur before you start. For example, legal expenses, early development or marketing expenses, signage, expenses for location or office, etc.
  2. The assets other than cash that you’ll need to provide the business before you start. That might be inventory, vehicles, computers, etc.
  3. The money you need to have in the bank to provide for operating deficits during the early stage of the business when sales aren’t likely to cover costs and expenses.

You might notice that item 3 in that list is also an asset, commonly called cash. So you could think of starting costs as just two lists, the starting expenses and the starting assets. I call them three items because that highlights the importance of estimating startup money in the bank.

To make that all-important estimate, you normally estimate sales and spending for the first few months of the business. That is often a deficit, so you subtract sales from spending to figure out how much extra you need to have as padding, in the bank.

In the image below you have an example for one hypothetical business. On the left you see a list of $6,000 of estimated expenses, and then a list of $54,000 of estimated assets. Total estimated starting costs are $60,000, the sum of both those lists. The starting cash needed is estimated at $12,000. That comes from doing estimated sales and estimates spending for the first few months, and calculating an estimated early deficit.

                                                         

 

Remember, all of these numbers are normally estimates. You don’t get to know, for certain, what things are going to cost. You do owe it to yourself and your business to call people, get estimates, read up on businesses cases, and make realistic estimates. That is as good as it gets.

Nobody else can really answer this question for you. The closest you’ll come to that is in a franchisee-franchisor business situation, with you as the franchisee. In that case the franchisor will have useful lists and estimates, and you’ll pay for that help with the franchise fee and franchise royalty.

On the right side of the table above, you have estimates for where that money is going to come from. In case, the business plan calls for a $20,000 investment by the owner plus $40,000 funded as debt.

So this is how you answer your own question, for your specific business, in your location, with your strategy, team, and resources. You make some estimates.

About the Author:

Tim Berry
Tim Berry

Guest Blogger

Founder and Chairman of Palo Alto Software and bplans.com, on twitter as Timberry, blogging at timberry.bplans.com. His collected posts are at blog.timberry.com. Stanford MBA. Married 46 years, father of 5. Author of business plan software Business Plan Pro and www.liveplan.com and books including his latest, 'Lean Business Planning,' 2015, Motivational Press. Contents of that book are available for web browsing free at leanplan.com .