The essential guide to startup costs: What every founder needs to know

The essential guide to startup costs: What every founder needs to know

Launching a startup is a challenging but exhilarating journey, one filled with promise and potential. But did you know that 90% of startups fail within the first three years? A big reason for this is the underestimation of startup costs, which will eat into your cash more quickly than you anticipate. Understanding and planning for all manner of startup expenses can mean the difference between your business taking flight or crashing before it leaves the ground.

That’s why Brex put together this essential guide to startup costs. Whether you're a first-time entrepreneur or a seasoned owner looking to expand, this roadmap will help you navigate the financial nooks and crannies of launching a business, including what startup costs really are, how to prioritize each, and how to budget for them effectively.

From legal fees and office space to marketing costs and employee salaries, Brexl breaks down the most common startup expenses and provides guidance on how to manage them. More importantly, you’ll learn how to calculate these costs accurately, explore strategies to reduce them, and help you avoid the pitfalls that have tripped up many before you.

If you're ready to turn your startup dream into a reality, think of this guide as your first step toward building a solid financial foundation for your business. Read on to set your startup on the path to success.

Most common startup costs and expenses

Every dollar counts when you're building a business from the ground up, and knowing where those dollars are most likely to go is half the battle. Let's dive into the most common startup expenses, so you can budget wisely and show potential investors that you’re ahead of the game.

1. Legal fees

Almost every startup will need legal assistance for:

• Business structure formation (LLC, Corporation, etc.): $500 - $2,000
• Contracts and agreements: $500 - $3,000
• Intellectual property protection: $1,000 - $5,000+

2. Licenses and permits

Industry and location often dictate the types of permits and licensing you’ll need:

• Business license: $50 - $500
• Industry-specific permits: $100 - $1,000+

3. Insurance

Most states require it. Essential coverage includes:

• General liability insurance: $500 - $3,000 per year
• Professional liability insurance: $1,000 - $5,000 per year

4. Technology and equipment

Core tech needs typically include:

• Computers and software: $1,000 - $3,000 per employee
• Website development: $2,000 - $10,000
• Domain and hosting: $100 - $500 per year

5. Office space

Even with remote work trends, many startups need a physical space:

• Coworking space membership: $200 - $500 per person/month
• Small office rental: $1,000 - $5,000+ per month

6. Marketing and advertising

This line item typically grows as you grow, but your initial marketing efforts will include:

• Logo and basic branding: $500 - $3,000
• Digital marketing (SEO, social media): $1,000 - $5,000 per month
• Promotional materials: $500 - $2,000

7. Inventory and supplies

Product-based startups incur a lot of physical costs:

• Initial inventory: Highly variable, typically $2,000 - $20,000+
• Packaging and shipping supplies: $500 - $2,000

8. Professional services

Most startups need ongoing expert support in some essential areas:

• Accounting services: $250 - $2,000 per month
• Bookkeeping software: $20 - $100 per month

9. Salaries and wages

This is often the largest expense and also will vary:

• Founder living expenses: $3,000 - $7,000 per month
• Initial employee salaries: $3,000 - $7,000 per month per employee

10. Software subscriptions

Essential SaaS tools often include:

• Project management software: $10 - $50 per user/month
• Video and chat communications: $15+ per user/month
• Customer relationship management (CRM) system: $20 - $150 per user/month

11. Travel and networking

Building relationships is crucial:

• Conference attendance: $1,000 - $3,000 per event
• Client meetings and travel: $500 - $2,000 per month

12. Miscellaneous expenses 
Don't forget to budget for:

• Office supplies: $100 - $300 per month
• Business phone/internet: $100 - $300 per month
• Unexpected costs buffer: 10-20% of your total budget

Remember, these are estimates and will vary based on your specific industry, location, and business model. It's important to research costs specific to your situation and then create a detailed budget that accounts for all potential expenses.

Be sure to set aside time to shop around for the best deals. You might find cheaper office space in areas hit hard by the remote work shift. Also, a lot of technology providers offer friends and family discounts, so be sure to hit up your network.

Understanding these expenses is not just about budgeting — it's also fundamental to your startup valuation. How efficiently you manage these costs, and how they relate to your revenue projections, will significantly impact how investors value your company.

How to calculate startup costs accurately

Calculating startup costs accurately is tricky, but it’s a key first step in launching a successful business. To begin, identify all necessary expenses by creating a comprehensive list of potential costs. This should include obvious items like equipment and rent, but also easily overlooked expenses such as business registration fees, insurance, and initial marketing costs. For instance, a tech startup might need to budget for software licenses, cloud storage, and developer tools, while a retail business would need to account for inventory, point-of-sale systems, and store fixtures.

Once you have this list, gather detailed cost estimates for each item. Consider consulting a fractional CFO who can help validate your estimates and identify commonly overlooked expenses. Don't rely on a single source; instead, obtain multiple quotes to ensure accuracy. For example, if you're budgeting for office space, contact several real estate agents, check online listings, and consult with other local business owners to get a range of rental costs. For major purchases like equipment, get quotes from at least three suppliers. Lean on online resources, industry associations, and networking contacts to gather benchmark data for less tangible expenses like marketing or professional services.

Finally, factor in contingencies by adding a buffer to your total estimated costs. While 10-20% is a common rule of thumb, the exact percentage should be tailored to your specific situation. Consider the complexity of your business model, the stability of your industry, and any potential regulatory changes that could impact costs. For instance, a straightforward service-based business might only need a 10% buffer, while a manufacturing startup dealing with complex supply chains and equipment might warrant a 20% contingency. Such a cushion can be hard to set aside, but it’s crucial for handling unexpected expenses, cost overruns, or delays in revenue generation.

By being as detailed and thorough as possible, you'll develop a more accurate picture of your true startup costs and be more likely to avoid financial surprises.

Cost-saving strategies that can reduce your startup costs

Whether you're bootstrapping or deeply engaged in startup fundraising, implementing cost-saving strategies can help you make the most of your available capital. Here are a few practical strategies that can help trim your startup costs without compromising on quality or productivity.

Utilize free or low-cost software and tools

Many essential business functions can be managed using free or low-cost software alternatives. For example, use Google Workspace for email and document management, Canva for basic graphic design, and Wave for accounting. Open-source software can often replace expensive proprietary solutions for tasks like project management or customer relationship management. By thoroughly vetting these free or low-cost options, startups can reduce their foundational technology expenses while enhancing productivity and efficiency.

Embrace remote work and virtual offices

Opting for a remote work model is a good way to reduce overhead costs associated with office space and utilities. Virtual office services can provide a professional business address and mail handling at a fraction of the cost of a physical office. This approach also expands your potential talent pool, allowing you to hire skilled workers no matter where they are. Additionally, studies show that remote work can lead to increased employee satisfaction and productivity, further benefiting your startup.

Outsource non-core functions

Outsourcing essential but non-core work, especially finance, is a pretty standard move in the startup world. Functions like bookkeeping, IT support, or customer service. Outsourcing gets you access to specialized expertise without the cost of full-time employees and associated benefits. It also provides flexibility, allowing you to scale services up or down based on your needs and budget.

Negotiate with suppliers and service providers

Approach your suppliers and service providers to see whether prices and terms are up for negotiation. Many vendors are willing to offer discounts for long-term commitments or bulk purchases. Consider proposing alternative payment terms, such as deferred payments or installment plans, to help with cash flow management. Building strong relationships with your suppliers now can lead to better prices and more favorable terms down the road.

Leverage co-working spaces

Co-working spaces like WeWork and Serendipity Labs are a cost-effective alternative to traditional office leases, especially for small teams. These spaces often provide high-speed internet, printing services, and meeting rooms at a fraction of the cost of standalone office space. Co-working environments also offer networking opportunities and potential collaborations with other founders and startup employees. As your business grows, you can adapt your space needs without being locked into a long-term lease.

Implement a lean startup methodology

Adopt a lean startup approach by focusing on developing a Minimum Viable Product (MVP) and iterating based on customer feedback. This approach helps avoid unnecessary expenses on features or products your target market may not want or need. Continuously gather and analyze customer data to inform your product development and marketing strategies. By staying lean and agile, you can minimize waste and allocate resources more effectively.

Get a startup credit card with rewards and perks

Opening a EIN only business credit card for your startup can help reduce costs through its rewards and perks. These cards often offer cash back on common business expenses such as office supplies, travel, and dining, which can add up to substantial savings over time. Many of the best business credit cards for travel also come with perks such as travel insurance, extended warranties on purchases, and access to airport lounges. Additionally, a business credit card can help you manage your cash flow by providing a grace period on payments, allowing extra time to pay balances without incurring interest.

3 startup budget mistakes to sidestep

When starting a business, it's essential to have a solid financial plan in place. One common mistake that can have a ripple effect is mismanaging startup costs. Here are three key areas where entrepreneurs often make missteps:

Mistake 1: Underestimating overhead costs

Overhead costs are the expenses that support your business operations but aren't directly tied to producing or selling your product or service. Examples include rent, utilities, insurance, office supplies, and employee salaries.

Many startups underestimate these costs, leading to budget shortfalls and financial strain. To accurately estimate overhead expenses, it's crucial to conduct a thorough analysis. Consider factors like the size of your team, the location of your business, and industry-specific costs.

To avoid underestimating your overhead, create a detailed budget that includes monthly and annual projections for each expense category. Regularly review and adjust your budget as your business evolves.

Mistake 2: Overspending on marketing

Marketing is essential for a startup's success, but marketing is, by design, a lot of trying and failing. You’ll want to take your marketing swing only after you’ve validated your concept and identified product-market fit. In fact, it's all too common to get caught up in the desire to reach a wide audience quickly.

So instead of focusing on expensive advertising campaigns, explore more cost-effective strategies. Content marketing, social media, and email marketing are tried-and-true ways to reach your target audience without much upfront financial investment.

Set a realistic marketing budget based on your overall financial goals. Track the return on investment (ROI) of those efforts to identify what's working and what's not. This will help you optimize your spending and allocate resources more efficiently.

Mistake 3: Failing to negotiate

Negotiation is a valuable tool for founders looking to reduce startup costs. Many entrepreneurs are hesitant to negotiate, but it can lead to significant savings on everything from office space to equipment.

Start by researching industry standards and market rates for the items you need. This will give you a baseline for negotiations. When negotiating, be prepared to offer alternatives or compromises. For example, instead of asking for a lower price, you might negotiate for extended payment terms or additional services.

Remember, negotiation is a skill that can be learned. Practice and confidence are key to achieving favorable outcomes.

By avoiding these common startup budget mistakes, you can lay a strong financial foundation for your business and increase your chances of long-term success.

This story was produced by Brex and reviewed and distributed by Stacker.