How to calculate startup costs for your business idea

Key takeaways

• Business startup costs are all the one-off fees and expenses associated with launching a new company 

• Typical small business startup expenses include market research, licensing fees, business insurance and rent

• You need to know how much starting a business is going to cost to get a business loan or other form of business funding

What are startup costs?

Startup costs are all the outgoings you need to make to launch a new business. In other words, it’s all the money you need to spend to get your business ready to sell your products or services to customers or clients.

These startup costs can generally be split into two main types of spending:

Investigatory outlays

When starting a new business, it’s essential to research whether other people or businesses will use the products or services you plan to offer. 

Investigatory work costs include:

• Doing market research

• Analysing existing products/services from rival companies

• Investigating ongoing costs such as rent and transportation

• Meeting with potential suppliers and distributors

Pre-launch costs

Once you have established a business case for your startup, there will also be pre-launch costs such as:

• Advertising, both digital and traditional

• Infrastructure such as electricity and an internet connection

• Commercial property deposits to secure rental agreements

• Recruitment of the employees you need

Examples of startup costs

The startup costs you face depend largely on the type of business you want to launch. 

If, for example, you plan to work from home, you don’t need to spend money on buying or renting a business premises prior to launch.

However, there are some startup costs that almost all new businesses have to cover. 

Examples of these could include:

• Registration fees: Unless you are setting up as a sole trader, you must register your new businesses with Companies House, which you can do for £50 online or £71 via the post

• Essential materials: This could be anything from laptops to lighting or signage. Manufacturing companies also need to invest in the equipment needed to make their products

• Accountancy/legal fees: Lots of business owners employ an accountant – or use accounting software – to manage their tax affairs. Many future companies also use accountants and solicitors to help with business planning and to ensure they will meet all their legal requirements

• Marketing: Many businesses also pay third parties to set up a website, design a logo, and create marketing materials such as posters

• Business insurance: It’s important to protect your business with the necessary insurance. Common types of business insurance include professional indemnity cover and public liability insurance. If you have employees, it’s highly likely you need employers’ liability cover. You can find out more about business insurance for startups with our handy guide

Why is it important to know your startup costs?

Running out of money is the main reason businesses fail. And that’s a lot easier to avoid if you know how much you need in the bank to start with. 

By calculating your startup costs, you give your business a much better chance of success.

Once your company is up and running, it’s also important to have a good idea of your ongoing expenses, such as monthly rent, utility bills and employee salaries.

That way, you know how much revenue you need to break even at the very least. 

Forecasting your ongoing operating costs also makes it easier to set aside enough money to weather any blips and pay expected running costs until you establish a regular client or customer base. Aim for six times your monthly outgoings as a reserve.

The best way to do this is to create a business plan that includes a cash flow forecast covering the first 12 months of trading as a minimum. 

It’s good practice to have this type of document when launching a business, and essential if you want to apply for a business loan, government Start-up Loan or other form of business funding. 

How to calculate startup costs for a small business

Calculating startup costs involves creating a financial forecast that covers all the costs you need to meet from before the business opens to the point where it starts making money.

Here’s how to do that in six easy steps.

1. Make a list of all the assets you need to buy, from machinery and computers to vehicles and stationery. 

2. List all the one-off initial expenses you expect to incur, including market research costs and business registration fees.

3. List all the anticipated fixed, recurring costs you expect during the first 12 months of trading, such as rent and internet connection fees.

4. Make an estimate of all the variable first-year costs that depend on the output or sales revenue of your business, including marketing materials and bills for stock.

5. Calculate your ongoing costs for six months by adding together known and estimated recurring charges and multiplying the total by six. Then total up your one-off costs. Add the resulting figures together.  

For example:

On-going expenses (known: £3,000 + estimated: £2,000) x 6 = £30,000 

+ 

One-off expenses: £4,000  

= £34,000

6. Then add a cushion of at least six months of ongoing expenses to give you an idea of the total cost of launching your business. In our example, that would equate to a £30,000 cushion and a total cost of £64,000).

Top tip

Research costs in your local area to make sure your estimated expenses are as close as possible to the real-world outlays. That way, you should avoid any nasty surprises. Depending on the type of business you are starting, you may also need to research commercial property rents and contractor rates.

How can I pay business startup costs?

Some entrepreneurs use their own money to fund the startup costs for their business ideas – or ask friends and relatives to pitch in. 

But if you don’t have enough money in the bank to cover your business startup costs, there are lots of other ways to finance your startup.

Popular ways include:

• Take out a startup business loan

• Find an angel investor

• Seek venture capital investment

• Try a crowdfunding website

• Get a peer-to-peer loan

For more information on the options available, check out our five-minute guides to sources of business funding and how to fund a business. 

Four practical ways to reduce startup costs

• Start small – ask yourself if you can keep costs down by renting a smaller premises or even working from home

• Collaborate with other local small business owners – for example, by sharing equipment or offices or by bartering your services

• Shop around for the best deal on everything – from supplier contracts to business insurance. The savings could make a big difference to your bank balance after the first 12 months 

• Make the most of small business tax relief – you can get tax relief on a wide range of expenses, including office supplies and vehicle fuel, as well as R&D projects