3 min read
New business owners shouldn’t underestimate the cost of setting up a company, as the hidden costs of running a business can have a dramatic effect on your long-term prospects, particularly if accounting and planning are neglected in the early stages. According to the Office of National Statistics (ONS), fewer than half of all companies (44.1%) that started out in 2011 were still in business five years later. Planning ahead can help you determine whether your business idea is financially viable. For start-ups, cash flow is all-important, so having a solid understanding of start-up costs is a crucial part of getting your business off the ground during the first 6-12 months.
What are business start-up costs?
Start-up costs can be defined fairly simply as the expenses that are incurred during the process of setting up a company. These costs can be loosely grouped into two key types of business set-up costs:
Investigatory costs – This covers the cost of your initial research, accounting for things like competitor analysis, consultancy fees, market research, and expenses incurred when doing deals with potential distributors or suppliers.
Pre-launch costs – This covers the costs that are incurred after you have made the decision to launch your business, but before the business is actually open. Generally, things like advertising, office furnishings, damage deposits, and so on are all considered to be pre-launch costs.
What are some examples of start-up costs?
But the cost of setting up a company doesn’t stop there. After your business gets up and running, there are a few more start-up costs that you’ll need to pay attention to: fixed costs and variable costs. Find out a little more about these business set-up costs and learn about the areas where you’re likely to be allocating a significant amount of capital:
What’s a fixed cost?
Fixed costs are costs that need to be paid, regardless of whether your business is able to turn a profit or not. While businesses in different industries have different types of fixed costs to deal with, there are a number of common fixed costs that are likely to affect start-ups across a broad range of industries:
Cost of premises – One of the chief fixed costs is leasing or renting commercial property. You may also need to consider service charges and utilities, such as gas, electricity, Wi-Fi, and water.
Staffing and employment – From freelance resources to full-time employees, staffing is one of the largest outgoing costs for start-ups to deal with. If you’re using a recruitment agency, you may also need to factor in fees paid to source new talent.
Marketing and sales – Whether you’re paying for digital marketing, designing your company website, chasing up sales leads, or sending out email nurtures, sales and marketing is one of the most vital start-up business costs – in a crowded market, it’s a must.
Insurance – Depending on your risk protection needs, you may also need to set aside funds for insurance. There are many different types of insurance that may be necessary for a start-up business, including professional indemnity insurance, employers’ liability insurance, and building and contents insurance.
Professional fees – The cost of hiring solicitors, accountants, and other experts to handle the legal and administrative aspects of forming a company can also be relatively high. From copyright protection to partnership agreements and company formation, there are lots of different areas that need to be covered.
And that’s not even half of it; there are plenty of other fixed business set-up costs to consider, including stock, equipment and supplies, finance, and technology expenses.
What’s a variable cost?
In contrast to fixed costs, variable costs are start-up costs that are likely to change in line with production or sales volume. If volume increases, variable costs will also increase, but if volumes go down, so will variable costs. Here are some of the most common variable costs that start-ups may need to factor into their accounting forecasts:
Product costs – The most important variable cost is the cost of individual products. The more of a specific product you purchase from a wholesaler, the less you can expect to pay, so for businesses that deal with a significant amount of raw materials, variable costs are likely to make up a high proportion of your outgoing business start-up costs.
Staff wages – In some cases, wages are a fixed cost. However, if you only hire workers who are paid for billable hours, then staff wages can be considered a variable cost.
Delivery – Finally, there are the costs associated with packaging and shipping. If you’re moving large volumes of products, delivery costs increase, while fewer deliveries mean cheaper delivery costs.
We can help
Start-up costs for new businesses can be significant, so to make sure you receive the payments you need to maintain a healthy cash flow, it helps to have an automated payment system in place. Find out how GoCardless helps businesses collect recurring fees and invoice payments.