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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 
  • Hiring
  • 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. 

Tax Information 

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.

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Pre-Launch Expenses

Business Plan

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.

Payroll

Once you’ve hired your dream team, you need to pay them! Human resources and payroll can be handled by an outside firm, like Aon Hewitt or Accenture HR.

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.

Research

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.

Insurance

Your company needs business insurance to protect your investment. Benefits, such as health insurance, are attractive to potential employees.

Advertising/Marketing

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!

Website 

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.

Office Space

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!

Office sharing programs, like Croissant or WeWork are perfect for startups. These allow companies on a budget to have a central work space.

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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.

Legal Contracts 

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. 

Accountant

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.

One-Time Expenses

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

Ongoing Expenses

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
  • Inventory
  • Advertising/Marketing
  • Website maintenance
  • Domain fee
  • Office supplies
  • Utilities
  • Insurance
  • Payroll
  • 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.

Final Thoughts

A startup is an adventure! However, it requires thought, planning, and cash. Don’t be caught by surprise by any of these expenses.

About AbstractOps

If you’re an early stage CEO, AbstractOps handles and automates your HR, finance, and legal ops — so that you don’t have to. We help you Be Scrappy, Not Sloppy.

We understand that ops can be painful. If you have any questions or need assistance with your ops, drop us a note at hello@abstractops.com. We’ll do our best to help.

References

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Best, R. (2021, March 04). Writing off the expenses of starting your own business. Retrieved March 12, 2021, from https://www.investopedia.com/articles/personal-finance/010616/writing-expenses-starting-your-own-business.asp

Broadbent, A. (2019, July 15). 12 small business startup costs you should Expect: Fora financial blog. Retrieved March 12, 2021, from https://www.forafinancial.com/blog/small-business/12-small-business-startup-costs-expect/

Business startup and organizational expenses. (2021, March 02). Retrieved March 12, 2021, from https://thismatter.com/money/tax/business-startup-deductions.htm

Calculate your startup costs. (n.d.). Retrieved March 12, 2021, from https://www.sba.gov/business-guide/plan-your-business/calculate-your-startup-costs

Caramela, S. (2020, July 20). How much money does it cost to start a business? Retrieved March 12, 2021, from https://www.businessnewsdaily.com/5-small-business-start-up-costs-options.html

How much money should you raise for a startup? (2021, February 01). Retrieved March 12, 2021, from https://www.abstractops.com/startup-overfunding-guide

Morah, C. (2020, August 28). Business startup costs: It’s in the details. Retrieved March 12, 2021, from https://www.investopedia.com/articles/pf/09/business-startup-costs.asp

Zarzycki, N. (2019, November 14). Business start up Costs (deduction examples AND RULES): BENCH ACCOUNTING. Retrieved March 12, 2021, from https://bench.co/blog/tax-tips/startup-costs-deduction/