Startup Expenses You Should be Prepared For In 2021
Unexpected expenses are never welcome. Financial and mental preparation are very beneficial to the future of your startup. Unfortunately, there isn’t a rote formula somewhere that tells you the exact monetary amount you’ll need for your startup. What are some expenses you can expect to see this year?
The Definition of Startup Costs
It’s a simple definition that covers a broad range of expenses. A startup cost is any expense that occurs as you set your business up and while it is running.
Some examples include:
- Marketing and promotional spend
- Salaries and compensation of your employees
- Office rental and utilities
- IT expenses including software and hardware you purchase
The Importance of Understanding Your Expenses
Understanding and accurately estimating startup expenses will help with:
- Attracting future investors
- Creating a budget that you can adhere to
- Tax preparation
- Estimating a profit
Since every business is different, there is no tried and true formula to calculate your exact startup expenses. However, by formulating a detailed business plan, you can be prepared.
There is good tax news for businesses starting in 2021. Tax deductible startup expenses were capped at $50,000 for dollar to dollar phase out in 2020, but the new tax deductible limit is $60,000. The first year business deduction for startup costs is $10,000, as opposed to $5,000 in 2020.
Find a trusted accountant to help you with your tax preparation and business set-up.
Even if you know exactly how you want to run your company, you may still want to utilize a professional consultant. Your initial business plan will set the tone for your company going forward.
Equipment and Technology
The one thing that all new businesses need is equipment! Whether you’re starting a lawn business and need mowers, or a tech startup and need laptops, you’ll need some type of equipment. Equipment financing is available, so you won’t need to pay for all your equipment out of pocket.
Office supplies can be an ongoing expense that really adds up. Allow room in your budget to regularly replace office supplies.
It’s best to start out prepared. Some market research can help you determine the trajectory of your startup. You may want to make room in your business plan for a market research firm.
Your company needs business insurance to protect your investment. Benefits, such as health insurance, are attractive to potential employees.
Get the word out about your exciting new venture! There are free methods of advertising, but you may need to budget for advertising or a marketing firm. Don’t neglect social media as a mode of free or cheap advertising!
An online, searchable presence is important for a startup. Register for a domain name. If you’re fairly web-savvy, you could use a site like Square Space or Word Press to build a website. If you need to hire a web design company, make sure to include that in your budget.
It is key to maintain professional, fresh content for your website. You can use a company like UpWork to find freelance writers or content creators.
Renting office space can be expensive. Many businesses start in homes in order to avoid this expense. If your business is fully-remote or remote-first, your office needs will be nonexistent, or minimal.
Try to avoid a long-term lease in the beginning. If you do have a lease, you’ll most likely sign it and begin paying rent before you generate revenue. You’ll also need to furnish your office space (see equipment). Don’t forget to budget for utilities, as well!
Licensing and Fees
You’ll need to license your business with the U.S. Small Business Administration (SBA). Follow the link to find out their guidelines. You may be able to simply register your business with state and local authorities, or your business may require federal registration.
It is important to find out exactly what you need to do to operate as a business ahead of time. Check the SBA’s guide to licenses and permits to determine exactly how to register your business.
Have legal counsel in place from the beginning of your startup. Legal contracts are key for an optimal company organization. You’ll need to budget expenses for legal ops such as incorporating your startup, registering your business in different states, geting your contracts drafted, and ensuring that you are meeting the legal requirements of doing business.
Let a professional handle the financial aspects of your business. A business accountant will save you time, money, and stress in the long run. Getting your financial statements in order from the onset will help you stay compliant with legal and tax hurdles as you grow.
There are some expenditures that are considered a one-time expense. This means that they are not revolving or ongoing expenses. These include:
- Market research
- Equipment and technology
- Licensing and fees
- Business consultants or freelancers
- One-off legal contracts
Other expenses are recurring. This means that you will need to keep a line item in your budget for them. These may include:
- Equipment maintenance
- Office space rental
- Website maintenance
- Domain fee
- Office supplies
- Recurring legal fees
- Accountant fees
Evaluate Essential and Optional Costs
While a cappuccino machine and a leather sofa are awfully nice, are they really necessary? Avoid impulse buys, and work everything into your budget! Check out the SBA’s guide to calculate your startup costs.
Evaluate Your Assets
Add up your current cash and assets. Don’t forget about equipment and technology.
Estimate Cash Requirements
For some startups, $2,000-$5,000 are enough to get started. For others, you may need more capital. Have a six-month financial plan in place for your business. Evaluate cash flow projections, and compare them to your expected expenses.
No matter how prepared you may be, sometimes the unexpected happens. Set aside cash for unexpected problems.
Beware of Over Funding
Too much cash sounds like a great problem to have! It’s important to not overfund, however. Overfunding happens when a startup achieves its funding goal, and continues to accept funds.
The problem with overfunding is that as funding goes up, so does spending. Overfunding can affect a business’s sustainability and exit options. It is far easier to learn to operate on a lean budget, than to have to make cutbacks later.
A startup is an adventure! However, it requires thought, planning, and cash. Don’t be caught by surprise by any of these expenses.
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