What are the costs to start a business?

Calculating costs and revenue is crucial for anyone looking to start a business, whether you’re a quick-moving startup or still evaluating whether to quit your day job.

These figures will help you determine if your business idea is feasible and will show you the fastest path to reaching a break-even point and long-term profitability.

The amount of money needed to start and sustain a business can differ significantly based on the type of business. This page outlines the typical steps to calculate the costs involved in starting a business.

When estimating costs, it’s better to err on the side of overestimation rather than underestimation.

Adding an additional 20-30% to your estimates is a prudent approach to account for unforeseen expenses or potential price increases that can accumulate rapidly.

Assessing the affordability of starting a business requires careful deliberation. The first step is to evaluate your personal expenses.

Thoroughly examine your personal expenditures, including your mortgage or rent, bills, food, school fees, and discretionary spending like cafes, movies, and event tickets.

Identify areas where you can reduce spending. Then, add up the essential expenses that cannot be reduced to determine the minimum amount of money you need to maintain your lifestyle.

While running a business can be highly rewarding, the initial stages can be financially challenging. Being realistic and honest with yourself from the beginning will help you avoid financial concerns.

Questions to ask yourself before you start

After considering the effect on your personal finances, the next step is to concentrate on the expenses involved in starting your business.

These tend to be the more expensive items including:

• Leasing or purchasing buildings or land
• Permits, licenses, or other compliance costs
• Equipment and/or machinery
• Vehicles
• Shop fittings and/or office furniture
• Branding
• Website development and domain name registration
• Registering your intellectual property (IP), such as trademarks or patents (but not all types of IP need to be registered).

These are regular expenses and costs you need to pay to keep your business running, known as overheads.

These are usually time-based, like monthly phone bills or quarterly rate payments. Typical fixed costs may include:

• Insurance
• Utilities such as electricity and internet
• Rent or mortgage payments
• Wages and salaries.

These are costs that fluctuate based on the level of production or business activity.

Common variable costs may include:

• Raw ingredients
• Production materials
• Stock orders.

An accountant can help you assess your projected expenses and identify any additional costs you may have overlooked.

If you plan to approach lenders or investors, having previous business experience, either from yourself or someone in your management team, can increase their confidence in supporting your business. If you are new to the business, it is beneficial to acquire skills and experience before seeking investors or applying for significant loans.

Lenders and investors will be interested to know how much personal investment you are willing to contribute to your business idea, in terms of finances, time, and effort.

Checklist of common business assets

Based on your estimated costs, the next stage is to create a cash flow forecast for the initial 12 months of your business. This typically involves preparing a spreadsheet that outlines the projected income and expenses of your business.

It is normal to experience financial losses during the early stages of starting a business. It is important to have sufficient funds in reserve to sustain yourself during this period. By creating a cash flow forecast, you can assess whether you:

• Have adequate financial preparation to launch your business
• May require additional funds through borrowing.

Getting paid on time

To help anticipate your income, refer to data specific to your industry type and analyse your competitors.

It’s a good idea to consult an accountant to get a clear idea of how much capital you’ll need to start your business.

When looking for an accountant or advisor, it’s best to choose someone who has experience working with businesses similar to yours.

Tips on getting financial advice

Another useful way to gain insight into profits and costs is by speaking with businesses similar to your own. You may be surprised at how open certain competitors are to sharing their experiences.

Statistics New Zealand and Inland Revenue offer a variety of tools to help you explore financial data for your market and competitors.