Starting a business is a dream for many aspiring entrepreneurs, but the reality of the costs involved can often be a daunting prospect. While some business models require minimal upfront investment, the success of a new venture can hinge on having enough capital to cover essential expenses in the first year of operation. At Shopify, we have seen countless entrepreneurs with humble beginnings achieve success, but we have also witnessed the challenges that arise when cash flow is limited.
To gain a better understanding of the true costs of running a business, we conducted a survey of 150 aspiring entrepreneurs and 300 small business owners in the US. The results shed light on the various expenses that new businesses face and how these costs can impact the success and longevity of a venture.
### How much does it cost to start a business?
On average, small business owners spend around $40,000 in their first year of operation. However, the costs of starting a business can vary significantly depending on factors such as the industry, business model, team size, cost of goods, and more. Our survey also revealed that product costs, operating costs, online store costs, shipping costs, offline costs, staff costs, and marketing costs are key areas where businesses allocate their budgets.
#### 1. Product costs
Product-related expenses, such as raw materials, inventory, suppliers, manufacturing, and patents, are a significant part of running an ecommerce business. In the first year of trading, product costs accounted for almost one-third (31.6%) of small businesses’ expenses. Managing inventory, product testing, and dealing with defective products can quickly add up and pose challenges for new businesses.
#### 2. Operating costs
Operating costs cover expenses to get your business up and running, including incorporation, legal fees, accounting software, and services. Small businesses typically spend around 11% of their budget on operating costs, with one-time startup costs like licenses, permits, and business insurance often catching entrepreneurs off guard.
#### 3. Online store costs
While aspiring entrepreneurs often overestimate the costs of launching an online store, the reality is that online costs account for around 9% of a business’s budget in the first year. Platforms like Shopify offer affordable solutions for creating and managing online stores, making it accessible for entrepreneurs without coding or design skills.
#### 4. Shipping costs
Getting products to customers is an essential expense for ecommerce businesses, with around 8.7% of annual expenses allocated to shipping. Packaging, labels, shipping insurance, and other related costs can impact a business’s bottom line, especially in the early stages of operation.
#### 5. Offline costs
For businesses that supplement their online presence with in-person sales, offline expenses like stall fees, office space, rent, and travel costs can add up. The average business spends around 10.5% of their budget on offline expenses in the first year, depending on their sales model.
#### 6. Staff costs
Hiring employees can significantly increase a business’s overall spend, with staffing costs accounting for an average of 18.8% of the first year’s budget. While solopreneurs may spend less initially, businesses that hire employees often see higher revenue growth, highlighting the relationship between team costs and business success.
#### 7. Marketing costs
Marketing is a crucial aspect of growing a business, but finding the right budget can be challenging. Businesses that spent between 7% and 12% of their revenue on marketing saw a positive impact on their overall growth. Balancing marketing spend with revenue generation is key to maximizing the return on investment in this area.
### How to calculate your business startup costs
When planning your budget for starting a business, it’s essential to consider essential vs. optional expenses, one-time vs. recurring expenses, and fixed vs. variable costs. Breaking down your startup costs into these categories can help with financial planning and ensure that you have a clear understanding of your financial needs in the first year of operation.
Based on trends among successful businesses and advice from startup advisors, allocating a certain percentage of your budget to key areas like operations, product, shipping, online, marketing, and team costs can provide a guideline for financial planning. Remember that starting a business is a long-term endeavor, and profitability may not be immediate, so give yourself time to establish and grow your venture.
### How to get money to start a business
While personal savings are a common source of funding for new businesses, there are other options available to supplement your initial investment. Financial support from friends and family, personal loans, merchant cash advances, crowdfunding, venture capital, and business credit cards are all viable ways to secure funding for your business. Creating a comprehensive financial plan and understanding your cash flow needs can help you make informed decisions about financing your venture.
In conclusion, starting a business requires careful financial planning and a realistic understanding of the costs involved. By analyzing your startup expenses, seeking funding from various sources, and setting aside a cash reserve for unexpected events, you can increase your chances of success in the competitive business landscape. Remember that building a successful business takes time, dedication, and strategic financial management, so approach your venture with a long-term perspective and a willingness to adapt and grow along the way.
