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If you’ve got a great idea and are thinking of starting a business, here’s something you need to know: successful start-ups don’t just have brilliant products or ideas. They also have functional and well-thought-out business plans and a clear understanding of the startup costs involved in a new business.
Without analysing startup costs for a business, you won’t know how much investment you need, how to cut down on your expenses, nor how to better manage your finances. To help you out, here’s our guide on startup costs for business founders and entrepreneurs.
Startup costs for a business are the costs necessary to set up and run your business. These are the sunk costs that all startups have to make. Sunk costs are those expenses that are non-retrievable, whether your startup succeeds or fails. When you set up your business, they can be referred to as initial costs that can be broadly divided into three categories:
Research costs: Starting a business means doing comprehensive research to understand the market, consumer preferences, competitors, labour supply, government regulations etc. You will also have to spend money identifying the right distributors and suppliers.
Registration costs: Every new business in the UK needs to be registered with Companies House. It costs £40 if you do it via post and £12 to do it online. You will also have to pay for business incorporation, set up a business bank account and registered office address. Along with these, you’ll also have to take care of your accountant’s and legal adviser’s fees.
Pre-launch costs: There’s an unavoidable go-to-market cost associated with any startup. You may have to hire an advertising or digital marketing agency for your website and to produce marketing collateral. If appropriate to your business type, you will also need to set up your office space, invest in its infrastructure and make deposit payments to the landlord.
While launching your business, you should also be aware that there will be certain costs that occur whether you’re profitable or not. These are referred to as fixed costs. Regardless of the sector that you operate in, you will have to pay most of these costs to get your business going.
Variable costs depend on the nature of your business, its revenue, stage of growth and the number of products or services you offer. In other words, these costs vary from business to business.
Consultants’ fees: These include what you’ll have to pay your lawyer, accountant, solicitor or any other expert for their services. Why? Because from bookkeeping to copyright laws, you will need professional guidance while launching your business.
Insurance costs: You will also need to pay for employer’s liability, professional indemnity, public or product liability and building or content insurance depending on the nature of your business.
Staffing costs: If you have permanent employees, you will need to pay for their salaries and any fees associated with finding the right people for your business.
Premise and infrastructure costs: These include everything from renting and leasing costs to utility bills and hardware and furnishings.
Research and development costs: If you develop your product or service, you will have to incur costs whether it’s one-time or recurring.
Product costs: It will also cost you to manufacture your product or service, or pay a manufacturer for it. These will vary depending on the order volume
Staffing costs: If you use consultants or freelancers, it falls under variable whereas wages for your permanent staff will come under fixed costs.
A crucial step in launching your startup business is calculating the costs you will have to incur. For this, you will need to separate it into three main areas:
Initial costs: These include research, registration and pre-launch costs. It also includes investments in machinery, hardware and any other asset you might need. When scoping costs out at this early stage, it’s always advisable to get some help from your accountant or financial adviser.
Fixed costs: This is what you have to pay regardless of your sector or size. From infrastructure to staffing and consultants, calculate how much you will have to pay in the first year.
Variable costs: These will depend on the size of your firm and its output. Calculate it based on the volume of products you plan to get to the market or the number of clients you plan to serve in the first year.
Calculating startup costs for a business will give you a clearer picture of how much money you need to get your product or service to the market and how long you can stay afloat before revenue starts coming in. It will also help you decide the pricing of your product or service and when and how you will be able to expand your offerings.
Practical tips on how to launch your startup business that every founder or entrepreneur needs to know