How Much Does it Really Cost to Start a Business?
Thinking of starting a business? Excellent idea. This article discusses various factors and elements when it comes to the cost of starting a business.
Starting a business is rewarding in many ways but as with most things in life worth doing, it may come at a ‘cost’. There are blood, sweat and tears so if anyone tells you it’s easy, take it with a pinch of salt. But when all is said and done, there is nothing more fulfilling than having started a business from scratch, and to have taken your business to great heights, and perhaps even sell it as at a lucrative price.
So, what costs should you be informed of?
As a Business Lawyer At Lazarus Legal, I am passionate about and specialise in working with start-ups. I’ve learned that most entrepreneurs don’t have a clear idea of the actual cost required to get their business up and running. In order to have a projection of how much money you’ll make, and how to get investors on board, you’ll need to get accurate estimates on your business costs.
In this article, I’ll mention some of the costs you can expect to incur in the first year of starting your business.
But let me preface with this – every business is different and depending on your business model and industry, your start-up costs will likely vary.
With that said, let’s dive into it and look deeper into these various costs
The cost of goods sold aka ‘COGS’ will be one of your main cost items. As this cost is important, there is no room for error. So, to make sure you get right, it is necessary to know that If your business is to sell products, your COGS include the costs like manufacturing, shipping, delivery, and returning products. If you’re in a services business, your ‘COGS’ will be the tools and human resources needed to deliver the service. Successful businesses are the ones that can maximise the value of their product or service and minimise their COGS at the same time.
Your overhead costs are the areas of your business you need to pay to support its operation. These are ongoing cost items but are relatively less proportionate to how much you sell than your COGS. An example is office rent, admin and some of the legal costs we’ll cover in this article.
3. Human Resources
The salaries paid to the employees of your business will be a significant part of your cost and depending on how you structure their employment or engagement, that cost will greatly vary.
For example, whether you are hiring someone as a full-time employee or as a contractor or perhaps just engaging them as shareholders in the business will impact your costs? A lot of businesses can get away with just having the business owner as the only worker of the company, but some businesses will need employees and contractors from day 1. There are ways to incentivise your employees whilst also minimising your start-up costs such as ESOP (Employee Stock Ownership Plan). We are able to assist you by helping you set it up or determine whether it’s a viable option for your business. Essentially, an ESOP allows your employees the right to get part ownership of your business in exchange for a discount on their salary.
If your business is in the field of technology, significant costs could be expected. For example, you might be a SAAS (Software as a service) business. This means that people and other businesses pay for your services to access the technology that you are providing.
But almost all businesses still have a technology cost which is the tools, systems and applications they need to run an effective business. to name a few, you’ll need a website, CRM (Customer relationship management) system and email marketing tools.
5. Sales & Marketing
You’ve got most of your cost items covered and now you’re thinking, how do I start selling my goods or products and expanding and growing my Start-Up? This is when Sales & Marketing costs come in. Depending on how fast and far you want to grow, sales and marketing costs will vary. For starters, if you’re an e-commerce business, you won’t have to pay for salespeople and commission, but your expenses will be heavily focused on things like online marketing, advertising, and branding. If you’re a B2B (business-to-business) organisation, then you’ll likely have to spend money on hiring salespeople, plus any online marketing, PR, or related advertising costs.
6. Legal Costs
Unless you’re a serial entrepreneur who has started several businesses, the legal costs of a startup are probably the most overlooked item. Ironically, they are the most important and crucial and the reason is, your legal work especially at the beginning of the journey is what’s going to protect and determine how far ahead you can go.
Legal costs will also depend on the nature of the business. For example, if you’re a beverage business, your trademark, labelling, suppliers’ agreements are very important to get right. If you’re a technology-based business, patents might be crucial for the success of your business.
Generally speaking, these are the main legal costs and items you need to be aware of
- Company structure and Shareholder agreements
- Intellectual property (Trademarks and Patents)
- Employment Agreements
- 3rd Party agreements
- Capital raising agreements
- Franchising arrangements
- Legal consultations
- Insurance & Liability agreements
Startup costs are a major factor in planning for your business to succeed. It’s important to have an accurate estimate of what your cost items are going to look like. You don’t want unpleasant surprises down the road. investing in your legal costs will pay off in the short-term and long-term by minimising and eliminating potential negative ramifications you can run into if you haven’t taken care of the legal framework on day 1.