When launching a business, figuring out how to estimate startup costs is often a key concern.
While typical business startup costs, such as formation, rent, inventory, and payroll may be easy to calculate, unexpected expenses may catch business owners off-guard, and blow up their budgets.
A common reason startups fail is "death by a thousand extra costs which cause drag on their business and so they fail to reach a point of sustainable growth," says Nathan McDonald, co-founder and president of Keiretsu Forum Seattle/Northwest, a chapter of Keiretsu Forum, a global network of investors.
Here are five often unexpected expenses you should consider when estimating your startup costs.
As you plan your business, you'll likely have a budget for marketing. But until you understand how much it costs to acquire each customer, you may find it difficult to accurately estimate your costs. This area is routinely underestimated, says Kimmy Paluch, managing partner and head coach at Chicago-based Beta Boom, a venture academy helping overlooked founders execute and scale their businesses.
"It's not just about creating an incredible product that meets a clear need, but making sure that you reach the audience that wants to buy it," Paluch says. "Getting to that point of astronomical adoption usually requires much creativity along with some capital investment."
You can maximize free or low-cost vehicles like social media profiles and email marketing, but you're also going to need to experiment with various types of advertising and marketing to find your optimal mix. And that takes budget, Paluch says.
Expertise and advice
Expert counsel can be key to a successful business launch and growth. "Many small businesses have failed due to poor operational management of accounting affairs," Paluch says. "Having a good accountant to help advise on financial projections, cash flow analysis, and at the least review bookkeeping can be the difference between running out of money early or adjusting expenses to weather dips in the business."
Founders may underestimate the accounting, tax planning, legal, and consulting advice they need. However, the cost of fixing mistakes, paying more in taxes, or facing penalties for getting financial and legal matters wrong can cost far more.
If you have a business that produces or sells products, the costs of managing your inventory may be surprising, says Abir Syed, a certified public accountant and business consultant.
"Many companies that sell physical goods don't consider the impact of storage and warehousing costs," he says. While you may factor in basic costs, if products or materials don't move as quickly as you'd like—often the case for optimistic entrepreneurs—costs can increase well beyond expectations. Inventory that sits too long may become damaged, outdated, or otherwise lose value.
Many startups also fail to understand the costs involved in building a unique and recognizable brand. "A small investment to create a name and brand that make sense by aligning with the product and market strategy will go a long way toward decreasing the costs of market entry," McDonald says.
This includes properly researching and testing the company name, brand identity, and product names. Taking shortcuts can lead to additional costs, especially if you face legal challenges or need to rename your business or products.
Great customer service cultivates loyalty in your customers. But providing that service comes at a cost, Paluch says. "Consider the case of Zappos or Rackspace that differentiated based on customer service and were able to capture market share quickly through word of mouth," she adds.
Initially, you may be providing customer service yourself. As your business grows, put systems in place and budget for customer service expenses like returns, "make-goods," and promotional pricing.
"As a startup coach, I typically recommend making the investment of both time and money to ensure that at the very least good documentation is in place, particularly onboarding, along with a system for fielding inbound support requests," Paluch says.
Keeping startup costs under control requires careful planning as well as anticipation of your business needs. With good preparation, you'll be set up for success.
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