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Why do you need to calculate business startup costs?

  • October 1, 2022
  • 3 min read
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Why do you need to calculate business startup costs?

Financial preparedness helps you to budget for expected and unexpected costs. A clear-cut view of your financial health can help you make better business decisions, keep your business afloat and ultimately boost profits. 

According to the same Geniac study, approximately two-thirds of small business owners experienced unexpected costs during their first year, leading to reduced profits and stunted growth.  

By strategically calculating your own business startup costs and factoring unexpected expenses into your budget, you increase your chances of success.

Calculating startup costs also helps you to:

Figure out if you can afford to launch your business at all

Explore multiple funding options if you do not have enough cash to self-fund your venture

Demonstrate to investors that you understand your startup costs, thus building trust

Decipher if your business idea is financially viable in the long-term

Discern if you can afford any staff to help you launch

Calculate a budget for all areas of your business, such as what and how many materials and equipment you will need to launch, how much it will cost to market and promote your brand, etc. 

If you fail to calculate your startup costs before you launch, you may end up grossly underestimating your needs. 

How do you figure out how much cash you’ll need to get started? 

The best practice is to overestimate what you’ll need in your business plan. Expenses can rise over time, so account for that inflation in your startup costs. Don’t make the mistake of overestimating revenue and thus underestimating costs—hope for the best, but plan for the worst.

Before you can calculate how much cash you’ll need to get started, you have to fully understand how your own business will run. You may want to seek business advice to help you determine the best legal and financial models for your business type, as they vary based on your business goals.

On the legal side, you have to determine your company formation type before you can register your business. Will you be registering as a sole trader, a limited company, a business partnership, or a limited iability partnership?

Each has its pros and cons as well as varying rules regarding taxes, reporting and responsibilities. We will detail the exact costs of registering your business under each company formation type in a later section.

Top Tip: To learn more about how to choose your company formation type as well as the benefits and drawbacks of each, read our guide on how to register a business in the UK 

On the financial side, you’ll need to grasp the basic fundamentals of accounting to avoid running into cash flow problems. This includes choosing the right accounting method and knowing the three main financial statements so that you can work bookkeeping tasks into your Online Business Startup.

Top Tip: To learn more about how to streamline your small business accounting process, read our complete guide to accounting for startups.

Once you choose your business formation type and accounting principles, you’ll have a much better handle on how your business will operate. This is key for helping you to accurately create a cash flow forecast and determine your projected revenue, things you need to include in your business plan if you are looking for investment.