While there can be significant costs to consider when starting a business – and potentially even more once you’re up and running – a little forward planning can help you figure out if your business idea is financially feasible.
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This is an important question to answer for the specific business you want to set up, as costs can vary greatly depending on the location and industry you want to get into.
Once you have the answer, it’s important to work out whether you have access to the funds you’ll need to get started and then keep your business going.
According to the Office for National Statistics (ONS) less than half (44.1 per cent) of the UK businesses that were started up in 2011 were still going five years later.
Unexpected costs and poor budgeting are two of the main reasons for the high business failure rate.
So what are some of the most important costs of starting a business?
Many new business owners don’t seek any professional advice before starting their venture, yet the planning stages of a startup are likely to be the most important. It may, for example, help you to get professional advice to choose your legal and financial model.
Read through our advice and resources for UK small businesses for some helpful signposts.
It’s worth considering how much you might need to spend on legal advice and the services of an accountant.
Many solicitors and accountants will give a first consultation for free, particularly if they think you’re likely to go on to be a regular client.
If you expect your business finances to be particularly complex, you may want to think about paying an accountant a retainer fee so you can consult them whenever you need advice.
Depending on your circumstances you might choose to set up 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 use a registered office.
It’s 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 on public record. You can choose to use an address hosting service with a formation agent, solicitor or accountant, which will incur a fee.
Unless you’re planning to work from home, you’ll need to find business premises. Relatively few businesses own their own premises – instead, most lease from a commercial landlord.
Many commercial leases, particularly those for retail premises, operate on a quarterly rather than a monthly basis. This can mean that you’re landed with a hefty bill every three months, rather than a smaller bill each month.
This can be one of the main reasons retail businesses run into financial difficulties, so it’s worth making sure you plan for this before you set up shop.
If you need 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 over and above a regular lease.
Even if you choose to work from home, there’ll still be setup costs. You’ll almost certainly need to buy office furniture and computer equipment, and being at home all the time will push up your monthly utility bills.
If you’re starting a retail business, stock is likely to be one of your biggest 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 buying stock until the last possible moment to make the most of your credit period.
The amount you spend on stock will depend on the nature of your business. But regardless of the sector you’re operating in, make sure you shop around to get the best deal from suppliers.
Tools and equipment can also be a big upfront expense as you’ll need these to do your work from the day you launch your business.
Marketing can be another big outlay for a new business. To make sure your new venture gets off on the right foot, and that customers keep coming back for more, you need to make sure that people know about your business and what it offers.
The type of marketing you do and the cost can vary wildly. While many offline marketing methods such as direct mail involve big initial outlays, some online marketing techniques are very cheap.
For example, optimising your website to ensure that you’re well placed in search engine results is a low-cost but highly effective way of generating leads.
Too many businesses don’t allocate enough of their budget to marketing, and startups that are strapped for cash often cut their marketing activities to try and save money.
It’s important to remember, though, that your firm will struggle to attract customers unless you make them aware of it. So you should think carefully before cutting your marketing spend.
Most businesses will need insurance from the day they begin operating. Without it, you’ll be risking hefty financial outlays if something goes wrong. Business insurance doesn’t have to be expensive, but it’s 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.
When starting a new business you may need to travel regularly to sales meetings or to client sites. So it’s important to factor travel costs into your business expenses, and remember to claim back any deductible costs in your tax bill. Check our article on what you can claim as self-employed tax deductible expenses for all the details.
It could 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 buying a car or commercial van.
If you’re 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’re 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.
Were there any hidden costs you didn't factor in when you started your business? Let us know in the comments below.
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30 January 2017 • 2-minute read
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