Business woman at white board

What Does It Cost To Start A Business?

Arizona Federal Staff

Looking to figure out how much it’s going to cost to start your new business? Start-up costs can add up quickly, but if you plan for them, you can launch with confidence and avoid running out of money before you make any.

Cost of producing your product or service
If what you’re planning to sell has a materials or initial inventory cost per item, you’ll want to determine this amount. 

For example, if you’re planning to sell clothes, how much will it cost you to produce each item? If you’re planning to sell food, how much will the ingredients cost? If you’re planning to start a lawn service, how much will the first lawn mower cost? Figuring out these costs can be done with a little research.

One-time start-up construction
If your business has a brick-and-mortar aspect, you’ll likely have some up-front construction costs. There can be many hidden fees in construction that you may not realize when getting started. 

These come in all shapes and sizes and include everything from expediting fees with the Department of Buildings to attorneys’ fees for dealing with unexpected things like air quality to engineering and architect fees that could expand depending on what’s found when the digging starts.

Finding a building for your business
You want to work with a real estate broker who understands your type of business so they can steer you in the right direction for spaces that already have a lot of what you need.

For example, if you need gas, look for a building that already has gas; if you need three-phase electric power, look for a building that already has three-phase electric power. Having all the "guts" can save you money in construction, especially if you’re looking to build a commercial kitchen for cooking or some other specialty space.

Industry related fees & expenses
There can be many hidden fees in certain industries that you’ll want to research ahead of time.

For example, if you’re planning to purchase parts or materials from overseas, while the price per item may be quite low, the freight and duties to ship it to your home country can be as much if not more than the cost of the actual item. This is where scale will become important for a business like this.

If you’re looking to open a business involving caring for children or serving food, you’ll be required to follow Department of Health guidelines, attain permits and certifications, and so on.

Other industries have their own required certifications, so do some research and be prepared to acquire them.

Insurance
Every small business needs at least a business liability policy. At the very beginning when you don’t have much revenue, this policy will be less than $500 per year. You may also want to get cybersecurity insurance, which will be about another $500 per year.

Other insurance that will come into play when you hire employees includes workers’ compensation, disability insurance and employee risk insurance. At some point there is also health insurance, which can be quite expensive if you’re insuring fewer than 10 people.

Some permits from the Department of Health require workers’ compensation certificates even if you don’t have employees. Find out all the requirements for your permits and certifications.

Deposits
If you’re renting a commercial space, some landlords ask for as much as six months’ worth of rent in advance. You’ll also be required to provide deposits to utilities companies. If you’re required to leave high deposits, you can try to negotiate that after the first or second year. One month be released each year until there are only two months’ deposits being held by the landlord.

Marketing
There are some up-front marketing costs you’ll want to budget for. If you want to go super inexpensive out of the gate, you can do some things yourself until you start making revenue and are able to invest in professional services. Here are a few items to consider.

Branding and logo design
You can either come up with a name and logo on your own for free or hire a firm for anywhere from $50 online to $1,000 at a reasonably priced agency. You don’t technically need a logo to start. You can simply choose a font you feel represents the company’s vibe and use it to write the name.

Once you start making money and get a few clients, you may want to invest in a professionally designed logo, depending on your goals.

New website development
In today’s digital world, you should have some online presence. If you’re not ready to launch a website, you can create either an Instagram or Facebook page that can function as your homepage until you’re ready for a website. You can also put together a simple homepage on your own with services like Squarespace.

If you want to invest in a simple website, you can create a few pages in PowerPoint and hire a web designer on Fiverr for a few hundred bucks. Once you’re ready to hire a professional designer and copywriter to help you with a professional website, you can plan to spend between $5,000 and $10,000.

Advertising and promotion
What everyone needs when they start a business is a paying client. If you can earn your initial clients from referrals and warm leads, you may be able to get sales by pounding the pavement and making phone calls. This won't cost you anything.

If your business requires drumming up business through meeting cold leads, you may need to create a promotional plan that involves an event, flyers or advertising in places where your target market hangs out. Make the plan first and then figure out how much to budget to execute.

General business administration
When you first start up, there are many free apps that you can begin using to keep yourself organized. Asana, Mailchimp, Zoom, Process Street and others have limited access for you to get started. Once you hit a certain threshold, you’ll need to start paying, anywhere from $10 to $50 per month.

Make a list of apps and figure out how much to budget for the first year.

Other administrative costs you’ll incur include bookkeeping and tax preparation, business organizational fees, intellectual property protection fees, general consulting and advisement fees, training and development courses (like Peer to Peer), merchant fees, banking fees, and other ancillary costs.

Unanticipated costs
No matter how well you plan, there will always be something you didn’t think of. It is a best practice to add on 10% of your estimated start-up costs for unanticipated costs to your business. If you’ve done a great job planning, you probably won't need more than 10% and hopefully there are no crises that cause you to need more.

Understanding the financial side of your business is essential to starting off on the right foot to building a successful business. Understanding the one-time versus recurring costs of starting a business will help you make good business decisions in other areas such as pricing and who you want to focus on as your target client.

Build good financial habits from the beginning and you’ll build a sustainable business.