The launch of a new company can cost between hundreds and millions of dollars, but what’s essential isn’t the amount of money you invest, but how you plan for and accommodate expenses. If you know you’re going to need to invest a significant sum for a piece of equipment, or for ongoing production costs, you can focus on securing the necessary capital to cover it.
If you’re blindsided by an unplanned expense, however, your entire profitability model could go up in smoke. Unfortunately, many startup entrepreneurs underestimate their costs, and drag their firm’s momentum to a halt.
What are the most frequently underestimated startup costs, and how can you work to ensure you anticipate them?
Most Common Underestimations.
These are the seven most frequently underestimated costs associated with startups:
1. Licensing.
Not every business needs a license or a permit to operate, but if yours does, the cost may be greater than you assume. You could need a license at both the federal and state level; and, depending on what you’re serving, when, and how, you could easily rack up thousands of dollars in new startup costs.
2. Legal fees.
Even if you’re a small outfit, you’d be smart to consult a lawyer before launching a business. A qualified attorney will be able to help you understand your potential liabilities, properly phrase your employment contracts and terms and conditions, and prepare for any potential legal issues that could surface in the future. You can expect to pay a few hundred dollars an hour here, but it’s unwise to skimp.
3. Employee and hiring costs.
You’ll need a team of talented, dedicated staff members if you want your business to prosper. But the costs of recruiting and paying salaries will likely place a major burden on your monthly budget … and most entrepreneurs underestimate that cost. You can mitigate the effect by providing alternative perks and benefits, such as flexible hours, which sweeten the pot for workers but won’t necessarily cost you much extra money.
4. Marketing and advertising costs.
You’ll need to market and advertise your firm in order to attract an initial client base. Many entrepreneurs underestimate the size of the needed investment to see results here, too. You can lower this cost by working with inexpensive online providers, or by using low-cost strategies such as social media marketing.
5. Production costs.
If you’re making a physical product to market, production might be a major expense, and therefore a substantial factor in what you will charge your customers. During the planning process, it’s easy to grow overconfident about your estimates. All it takes is one unforeseen variable to throw a wrench in your plans and damage your profitability model.
6. Insurance.
You probably know your business is going to need insurance, but you may not understand the full scope of various insurance policies your company should carry … or how much they’re apt to cost. Ultimately, they could pose a financial burden that runs into the hundreds or thousands of dollars a month, but the rate could vary significantly, depending on what you’re selling, how you’re selling it, and what you need for adequate insurance coverage.
7. Taxes.
Every company needs to plan for taxes, yet many business plans neglect this element. You should be aware of all the credits and deductions your business might qualify for, and know how much to put aside for estimated tax payments each quarter. That can be a tall order for anyone who’s not specifically trained in tax law. You may need to seek outside assistance to arrive at an accurate figure.
Tips for Better Estimates.
Knowing these areas are frequently underestimated isn’t going to be enough to solve the problem. You’ll need to labor proactively if you want to make your estimates fairly accurate. Here’s how to do that:
1. Do as much research as possible.
The information is out there — if you care to look. Investigate the average costs for various services in your area, and talk to experts to get a clearer picture of how much you may have to pay.
2. Talk to other business owners in your niche.
The other executives in your region and field might be willing to give you their perspective and advice. See if you can find out how much they pay for these expenses, to arrive at a relative gauge for what you will be paying.
3. Get firm quotes.
If you can, get firm, written quotes from the service providers you’re considering. This is one of the best ways to ensure accuracy.
4. Plan conservatively.
Finally, plan your budget as conservatively as possible. Allow some wiggle room, and project costs in excess of what you think they’re going to be.
If you don’t want your business to fall because of an underestimate, work proactively to hone your financial planning. It’s impossible to forecast everything, of course, but the more accurate you can be, the better your chances of success.
