How much does it cost to start your own business in the UK?
The cost of starting a business will differ for every new start up. There’s a delicate balancing act at play here, given that over half of businesses established fail to survive past their first five years. You want to minimise startup costs to reduce the length of time it takes for you to break even and start being profitable, but, at the same time, you mustn’t underestimate the costs of starting a business - as unexpected costs can lead to stunted company growth, and therefore, lower profits. So, how are you meant to work out exactly how much it costs to make your business idea a reality?
Why Do You Need to Calculate What it Will Cost?
Once you’ve thought of a business idea, it’s tempting to jump straight in. Is there really any benefit to planning how much things will cost? Why not just get started and cross each bridge as you come to it? Well, unless you have unlimited funds, budgeting and calculating costs before getting started are important to ensure your business doesn’t end up as part of that statistic we mentioned earlier - the one where over 50% of startups fail to get past their first five years in business.
Once you sit down and start working it out, you might be surprised by just how much there is to pay for when starting a business. Calculating the costs is the most realistic way to learn if you can afford to start the business at all. After all, those profits won’t come in immediately. First, there’s a lot of work to do, and a lot of things to pay out for. Unexpected costs can lead to smaller profits and can prevent business growth as you have to stop and deal with the problems. If you can reduce these unexpected costs, and prepare for all outcomes from the start, your long term profits will benefit.
On top of this, calculating your costs before starting your business helps you to plan where your funding will come from - particularly if you know you won’t be able to afford it all yourself. If you’ve read our article on investment, you’ll know just how many places you can look for funding. But, in order to get this help, most investors will want to see a solid understanding of where their funds will be going, and exactly how it’s going to grow your business. No one wants to see their money going straight down the drain! So, not only do you want to calculate your total costs, but you also want to decide the best allocation of funds, including where you can afford to cut back if possible.
How Do You Work Out How Much Money You Will Need?
To work out how much money you’ll need to start your business, it can help to make a list. Jot down everything necessary to get your business up and running; all of the initial one time costs to get the ball rolling, like equipment, business registration, and so on, but also all of the long-term recurring costs, such as offices, equipment, and staff. To make an accurate list, you’ll need to know exactly how your business is going to run. At this stage, it doesn’t hurt to be over-prepared.
In general, it’s a good idea to overestimate what you need. This way, you’re less likely to be affected negatively when an unexpected cost appears. No matter how prepared you are in calculating your costs, there’s always the chance that something will take you by surprise, or that you will have forgotten to include something in your initial estimates. Let’s take a look at some of the most common startup expenses to help you minimise this risk.
What Are the Standard Start-Up Expenses?
Once you start looking into start-up expenses for a new business, you might realise there’s a lot more to pay for than you first thought. And, it’s important to consider all areas to be sure you’re avoiding those unexpected costs later down the line. Here are some of the standard expenses you might encounter when you’re trying to start your own business.
Research Costs
First up, you have any research costs. This isn’t something that everyone will have to, or want to, pay for. In fact, a lot of market research can be done for free. But, investing some budget into target-audience research is important for some startups. The price of market research through official firms can vary a lot, so it’s something that can fit into a surprising amount of budgets.
Registration Fees
The cost of business registration fees will vary depending on the structure of your business. No matter how much it costs, this is a one time fee, it won’t be part of your rolling costs. Registering as a sole trader is free, but it can cost between £10 and £100 to register as a limited trader, limited partnership, or limited liability partnership in the UK.
Business Premises
If your business is just going to be you then by and large you’ll probably start working from your kitchen. But most businesses don’t stay one person for long and that brings up the question of where you are going to work.
It’s possible to setup a fully remote company with everyone working from home but it may also make sense to have access to an office. In this case a co-working space can be a great starting point as they tend to be flexible in terms of use of head count and need for facilities and are a lot cheaper than leasing office space directly.
The downside of co-working spaces is that, as your headcount grows, they tend to get less convenient (for example access to meeting rooms is often hotly contested) and more expensive. At that point you will probably want to look into a space of your own. A guide that it up to date as of this writing is: https://osome.com/uk/blog/what-to-know-before-renting-office-space-uk/
Product
Are you creating a digital product from scratch? If so you need to have a decent idea how long it will take to get to the point where you actually have something to sell. Development costs are notorious for spiralling out of control if you don’t have a firm grip on them.
Are you planning on employing your own dev team or using freelancers? Are you looking to employ an agency to do the build for you? Each option comes with its own unique set of financial challenges. And we’ve written a lot on how you can ensure you get the right people on your team.
Website
In today’s age, a website can be make or break for your company. A good website is important for securing an online customer base and even for online sales. It can be an excellent marketing aid, and a great tool for business growth. A bad website will cause potential customers to go elsewhere, especially in the world of SaaS products as your website is your sales team, at least in the early days of the company.
The type of website best suited to you will depend on your specific product, the problems you are solving, and the niche you intend to sell into. It’s tricky to put a price on a good website here, but depending on what you need your site to do you could be looking at tens if not thousands of pounds.
And then there are the things like hosting, data storage and so on that all come with their own costs.
Marketing and Branding
Once you have a product to sell you need to in a position where you will actually be able to attract customers. There is no point in relying on hope to market your business.
You may with to bring marketing in house, or you may wish to use an agency to do it for you. But you will likely find yourself spending a lot of time learning all about SEO, PPC, CRO, and lots of other three letter acronyms (You mean TLAs right? - Ed)
Office Supplies
We all want to work in a paperless environment, but it is rarely 100% possible. So you’re going to need stationery. You’re going to need computers, if you’re working remotely then laptops, if your plan is to be office based then you may prefer desktops. But remote working is unlikely to go away, so the hybrid approach is likely to be the best suited to a new tech start-up. In that case you’re going to need to look at docks for laptops.
And that’s to say nothing of desks, chairs, break-out areas, conferencing equipment, a boardroom table and much much more.
Will you be cloud based or using on premises servers to store your data? It’s typically a simple decision to run cloud based and comes with few downsides. However, wherever your data lives, you need to consider the sort disaster recovery systems you will need. Considering this after the disaster has happened will leave you doubly unhappy!
If you go down the route of cloud based systems then which stack are going to work on? Typically this means choosing either Google or Microsoft. What kind of software will you need? What operating systems are you planning on using? Windows? macOS? Linux? Will everyone be using the same, and if not how will you share files and work on code?
Professional Services
Professional fees are also be something you should include in your calculations. This could be fees for accountants, solicitors, IT assistance, financial advisors, business consultants and more. These services might not seem vital, but getting professional help at an early stage can be a great way to increase your growth speed. It is all too easy to find yourself spending several days fixing a problem it would take an expert a couple of hours to sort. Is that actually a good use of your time?
Business Insurance
Another expense to consider is insurance. This is vital for protecting your business, but also for protecting your assets and customers if anything goes wrong. There are several different types of business insurance available, so make sure to research which one is going to be right for you.
Payroll and Recruitment
In the initial months, your company may be quite small, but, if your business grows as planned, you will find yourself needing extra staff.
Run the numbers beforehand. If you are expecting to recruit five people in year one then you’re likely going to need to interview three times that. In a multi stage recruitment process that is 30 interviews as an absolute minimum. To get a person to interview you are probably going to have to read through ten CVs.
Are you able to dedicate that time? Or do you need to get some help?
Take into account potential recruitment costs, if you’re sourcing talent through temp agencies, payroll fees, including pension contributions and national insurance contributions, and variable rates for freelancers.
What Are The Different Types of Expenses?
We’ve listed some of the main expense areas you’ll need to consider when starting your own business, but each of these also fall into various categories that will impact your spending. Here are some types of expenses to consider when calculating your costs:
Sunk costs: These are usually your initial costs, that get your business up and running. They are one time costs that you won’t get back, but are vital for your company’s performance and growth in those early months.
Fixed or ongoing costs: These are the funds paid on a regular basis. They will rarely fluctuate and are often written into contracts. Fixed costs include things like interest fees on loans, rent, utilities, and so on.
Variable costs: Unlike fixed costs, variable costs will… well, vary. This will be things like seasonal spikes in business, such as higher demand in retail businesses before Christmas.
Essential costs: This is anything that is absolutely necessary for your company to continue in business, or to develop and grow.
Optional costs: In contrast, optional costs aren’t essential for your company’s existence. But, they can be beneficial when you have excess funds. Optional costs can include things like increasing your advertising budget, or investing in website upgrades.
Should You Try to Minimise Costs?
Since the goal of any business is to profit, it is a good idea to minimise your costs when first starting out. But it’s really important to understand where you get caught in a false economy. Holding back on hiring the right CTO may save you money in the short term, but cost you a lot more in the long run.
If you are developing a product from scratch then you can’t even begin to think about profitability until you have something to sell. And so getting to that poi9nt quickly may well be a good idea. But that mean more people, and therefore more expense.
What Will You Inevitably Forget?
There are some things that will always take you by surprise. For instance, many people forget to consider expenses like the travel costs of getting to business meetings, whether this is when finding investors, or meeting with clients and customers. That may not be a big deal if it is a case of jumping on a train to London, but if a potential investor wants to see you and they are based in San Francisco that is going to be a lot more expensive.
In order to be prepared for any expenses that you inevitably forget, it’s a great idea to establish an emergency fund. Replenish it if you ever have to spend the money, and don’t use this fund for things like the optional expenses we mentioned earlier! This should be kept for emergencies and unexpected essential costs only, so you have something to fall back on.
Where Do You Find the Money You Will Need?
Once you have a good idea of what it will cost you to get your business up and running you need to look at where you are going to get the money to do it.
Unless you are extremely lucky you are likely to have to generate some kind of investment, but that is a subject all of its own which we looked at briefly here.
How Much Does it Cost to Start Your Own Business?
The costs of starting your own business will vary depending on your product, your location, the skills you bring to the table, and more. Whether you’re trying to figure out your startup costs, or you’re trying to find the best place to secure investment, get in touch for further help!