As one of our most popular articles we have updated this for 2018.
Starting a business can seem like an expensive prospect. While many firms are launched on a shoe-string with very limited resources, there are numerous and significant costs associated with a new venture – many of which may not be apparent at the start.
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If you are considering starting your own business, it is vital that you properly think through the potential costs, and that you have sufficient capital available to cover them. A huge number of start-ups fold almost as quickly as they open; indeed, in some parts of the country, as many as 50 per cent of firms fail within their first five years.
Unexpected costs and poor budgeting are two of the main reasons for these high business failure rates. You must ensure that you have enough cash available to avoid becoming part of these statistics.
So what are some of the most important costs you will have to cover when starting a business?
A worryingly high number of new business owners do not seek any professional advice before starting their venture. The planning stages of a start-up are the most important; choosing a legal and financial model is particularly crucial and you may need professional advice to help you do this. Read through our advice and resources for UK small businesses for some helpful signposts.
You should factor in the cost of legal advice and a consultation with an accountant. Many solicitors and accountants will give a first consultation for free, particularly if they think it will secure future business. Indeed, you may wish to consider taking an accountant on retainer, particularly if you think your financial affairs will be complex.
Depending on your circumstances you may choose to incorporate your business, for example as a limited company. While it is relatively cheap to do this directly through Companies House, most people choose to use an intermediary firm to complete the paperwork. This process starts at less than £10 for the most basic online service, but can easily run to hundreds of pounds, particularly if you require a registered office.
It is also worth remembering that The Companies Act requires company directors to provide their ‘usual residential address’ to Companies House. If you also choose to provide your home address as the ‘service address’, this will be part of public record. You can choose to use an address hosting service with a formation agent, solicitor or accountant, but this will be for a fee.
Unless you are planning to work from home, you will need to find business premises. Relatively few businesses own their own premises; instead, most lease from a commercial landlord.
Many commercial leases, particularly those involving retail premises, operate on a quarterly, rather than monthly, basis. This can mean that you are landed with a hefty bill every three months, rather than a smaller bill each month. Indeed, this is a major contributing factor to the collapse of many retail businesses, and should be understood from the outset.
If you require office space, rather than retail premises, you might want to consider serviced office leases. These offer you far greater freedom, shorter agreements, scalability, and the opportunity to pay monthly. Finally, serviced leases almost always include business rates, which can otherwise be a major financial burden with a conventional lease.
Even if you choose to work from home, there will still be set-up costs. You will almost certainly need to buy office furniture and computer equipment and being at home all the time will push up your utility costs.
Stock, tools and equipment
If yours is a retail business, stock is likely to be one of your most significant expenses. Suppliers will mostly offer you 30 days’ credit – or more, in some circumstances. You can take advantage of this to help ease any cashflow problems during your first month of business. You might want to put off purchasing stock until the very last possible moment, in order to make the most of your credit period.
The amount you spend on stock will depend entirely on the nature of your business. But regardless of the sector in which you operate, you should make sure that you shop around to get the best deal from suppliers.
Tools and equipment can also be a considerable upfront expense as you should have everything you need to carry out your work from the beginning.
Marketing can be another big outlay for a new business. In order to ensure that your new venture gets started with a bang, and that customers keep coming after the launch, you need to make sure that people know about it. Take a look at our Marketing hub for regular inspiration.
The type of marketing you do and the cost can vary wildly. While many offline marketing methods such as direct mail involve quite significant initial outlays, some online marketing techniques are very cheap. For example, optimising your website to ensure that you are well placed in search engine results is a low-cost but highly effective way of generating leads.
Far too many businesses do not allocate enough of their budget to marketing, and start-ups that are strapped for cash often cut their marketing activities in an effort to save money. It is important to remember, though, that your firm will struggle to attract customers unless you make them aware of it. As such, you should think carefully before cutting your marketing spend.
A business should have insurance from the day it begins operating. Check out our insurance articles hub here for regular insight. Without it, you are vulnerable to large financial outlay if something goes wrong. Business insurance does not have to be expensive but it is important to get the right types of cover for your business.
The main ones to consider are public liability insurance, professional indemnity insurance and employers’ liability insurance, but there are also many other insurance covers which can protect things like your tools and equipment and your premises.
With Simply Business you can get all the covers you need in one simple business insurance policy and compare the prices of policies from a range of insurers.
When starting a new venture you may be required to travel regularly to sales meetings or to client sites. Therefore it is important to factor travel costs into your business expenses, and remember to claim back any deductible costs in your tax bill. Check our Self-employed tax deductible expenses: what can I claim? for all the details.
This might be the cost of public transport (and if you’re saving the pennies, public transport can be a great way of cutting costs) or it may be the purchase of a car or commercial van. If you are buying a new vehicle, remember to include all the associated costs in your cashflow plan, such as road tax, insurance, loan repayments, warranty, and breakdown cover.
If you are using your personal car for business purposes, you should check whether your current insurance covers business use. It often makes more sense to switch to commercial vehicle insurance for flexible protection.