Nothing in life is free, especially when it comes to launching a startup. Sure, some helpful friends and family members might volunteer some of their time, know-how or even money at the beginning of your new venture. However, eventually you're going to need some serious money when facing the cost of marketing, office rent, legal expertise, website domains; the list really is endless.
Although there are some ways to cut costs, like working from home or running your own social media strategy, the bottom line is launching a startup is expensive. Here, we take a look at how you can work out just how much capital you’ll need to get your new business up and running.
Calculating the cost
When it comes to calculating your costs, most professionals advise that you estimate how much cash you’ll need in the bank to support your startup for the first six to 12 months. To do this, you need to try and work out your projected sales, costs and expenses for each month and then subtract your costs and expenses from your total sales figure. The final number will give you a good idea of whether you’ll be short of cash during that period.
Typically, your business outgoings can be divided into two categories, assets and expenses. An asset is defined as something which you will use in your business long-term while an expense is a cost that doesn’t retain value. However, it’s not always that black and white. Some things you might consider to be a business asset, such as computers and office equipment, can also be filed as an expense due to the tax benefits offered to businesses.
Being self-employed means that some business necessities are tax deductible and the cost of them can be deducted from your taxable profit. For example, if your turnover is £40,000, and you claim £10,000 in allowable expenses, you only pay tax on the remaining £30,000 - known as your taxable profit.
A business expense is money you need to spend on something that doesn’t retain its value in the long-term. This could include the salary you may pay your employees, setting up your office space, legal work or utility bills.
However, as previously mentioned some of these expenses are tax-deductible. According to the UK government, costs you can claim as allowable expenses are office costs, travel costs, clothing expenses such as staff uniforms, staff costs, insurance or bank charges, heating, lighting and business rates, website costs and training courses related to your business.
An asset is a tangible resource that belongs to you or your business and is still worth something after a year or more. The best assets grow in value over time however, it is also possible for assets to decrease in value too.
In order to accurately work out your initial costings, it’s important you make a detailed and comprehensive list of all the essentials you need to start your business. If you’re unsure of how much some of these items will cost, do some research. Making a series of educated guesses is not going to be very helpful.
Your list of assets should also include the money you will have in the bank account to run your business as well as the money you need for personal use as, unfortunately, it’s unlikely you will break even in the first year of launching your business.
How to get funding
Ultimately, the aim of any startup is to begin turning a profit and grow the business from those initial financial resources. However, in the first year or so when businesses are still trying to get off the ground, it’s often a struggle to break even, let alone turn a profit.
According to Anand Sawal of investment analysts CB Insights in the US, two-thirds of startups have less than a year's worth of money available. For that reason, many new businesses often turn to alternative funding sources to help see their venture through its launch phase.
Today, cash-strapped founders have a range of options available to them. You can go to an angel investor, a venture capitalist, bootstrap the business with your own money, crowdfund, ask for a bank loan, partner with a bigger firm, or even run an Initial Coin Offering (ICO) to raise funds.