Understanding the true costs of starting a small business


Many of us have dreamed of starting our own business…being our own boss, in control of our destiny then sailing away in that yacht once the business takes off.  When planning on launching your own business, whether it’s a retail venture or independent contractor or service business, there will be a myriad of hard costs associated with it.  Most entrepeneurs plan for the execution of the idea and focus on post launch activities like marketing and sales but don’t put enought thought into the real costs and expenses that go along with getting it off the ground.  In this blog we’ll explore the real costs associated with a small business launch and tips for how to plan and execute.

In a comprehensive study in 2009, the Kauffmann Foundation estimated that the average cost to start a business from scratch was about $30,000. The reality is some businesses can start for much less, such as a 1099 consultant or much more such as purchasing a franchise.

Aside from money in the mattress, there are a variety of ways you can go about the initial funding of your small business.

  • Self funding – assuming your have the money in the mattress or bank – this is the obvious option
  • Friends and Family – commonly used but carries personal risk in the event the business fails causing family rifts
  • Small business loans – with a myriad of new vendors on the market such as Kabbage, these lenders are focused heavily on small business lending
  • HELOC – extracting equity from your home as an initial startup loan
  • Angel investors – these are easier to find today with online services such as Angel Investor Netwok and others like it designed to connect entrepeneurs with early stage investors
  • SBA – the small business association provides a wealth of resources on how to secure small business loans from the government

When planning your funding sources, it will be important to consider the real expenses in starting a new business from scratch.  Again, keeping in mind the variances in start up costs relative to the type of business you’re starting, here’s a punch list of the most common and universal expenses you will incur.

  • Incorporation and Legal Fees
  • Office Equipment, Supplies and Space
  • Communications & Utilities
  • Licenses and permits
  • Insurance
  • Accounting and Bookkeeping fees
  • Inventory
  • Employee salaries
  • Advertising and marketing
  • Making a website

It’s helpful to create a worksheet for all expected expenses for the first twelve months of your business.  For items such as legal and incorporation fees, estimate the one-time expense.  For other items such as bookkeeping services or software for bookkeeping, factor in the monthly service fees over the first year.  The output of your worksheet will be the baseline for your total start up costs for year one and will help when securing lines of credit or outside investment.  The SBA.gov website also provides useful tools for creating these worksheets.

Be sure when planning expenses, you also have a plan for tracking and maintaining visibility into your expenses in as close to real time as possible.  One of the great failings of a small business, particularly in year one, is keeping a close eye on your P&L (Profit/Loss).  It’s imperative to have visibility into your expense and spend on a weekly or monthlty basis.  This is particularly true of businesses that incur a high volume of job-related expenses such as contractors, trades, florists and medical practices.  Tools like the cloud software from Neat are purpose-built to help your manage your expenses digitally and prepare for tax time but also allow you to run real-time reports on expense and spend so you’re not caught off guard by not having enough cash on hand to purchase materials for a job.

In conclusion, nobody starts a business because of their passion for accounting, bookkeeping and paperwork, but proper planning and discipline, especially in year one, will give your business the best odds of early success and lay the foundation for growth.


This article presented by:
The Neat Company
Neat provides expense, bookkeeping and document storage solutions for small businesses and sole proprietors. Our suite of web and mobile software help eliminate paper-based expense and spend tracking for your business and reduce onerous bookkeeping tasks.
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