Estimating Start-Up Costs

One of the more common --- and more challenging --- questions entrepreneurs ask us about is startup costs: what resources exist to get an idea of the initial investment required to get my business off and running?

First it needs to be said that finding average startup costs for specific types of businesses is pretty difficult and usually involves some good-faith best guesses. Why? Well, so many factors are involved --- location, local economic conditions, current industry trends, experience of the business owner (are clients already lined up, is the necessary equipment already available), ambitions/scope of the business, cost of inventory/supplies, type of business, and so on --- that even if an average cost were readily available, it may not be all that meaningful for the circumstances of the specific entrepreneur posing the question.

In the end, the people most likely to have the most useful and accurate numbers --- your already-established direct competitors --- may be less than willing to help you out. So where else can you look?

One place to start, believe it or not, would be with the people most likely to have the most useful and accurate numbers: your already-established direct competitors. Okay, maybe not your most direct of competitors, but certainly those who have been in your shoes. According to one article,
“Don’t be afraid to seek out other entrepreneurs who have set up shop in your industry, or perhaps a related one, and talk to them about their experience with start-up costs, especially unexpected costs.” 

If you’re not quite comfortable with the direct approach, you could start with locating a trade association that covers your industry, and then contacting that group. Trade associations will sometimes publish surveys that include information like startup costs and/or average money spent on certain things (i.e. advertising, inventory, etc…).  In addition to published surveys, try searching their magazines for information or contacting them directly for advice. Who would be more willing to help you get started than a group that will one day soon recruit you as a dues-paying member, after all.

Non-industry-specific surveys are occasionally conducted by outside groups or market research firms, and some general information can be found from sources like the Wells Fargo/Gallup Small Business Index, or the Kauffman Foundation’s Firm Surveys, or the Global Entrepreneurship Monitor’s executive report.

Government sources are also worth a look-see to get a general idea of startup costs. The Small Business Administration has published some estimates along these lines, and our friends at the U.S. Economic Census publish a Business Expenses Survey to provide periodic national estimates on operating expenses for merchant wholesale, retail trade, and selected service industries.

For publicly-held companies, a good deal of cost data may be available in the company’s annual or quarterly reports, and while this won’t be an exact parallel for your shiny new startup, the costs of an industry leader may allow you to draw some conclusions: “Look at industry leaders to help predict your own business’s costs. If you’re opening a boutique coffee shop, scan the financial statement of a similar company that's publicly traded, such as Caribou Coffee. Obviously your revenue numbers will look a little different, but break down how much a coffee chain spends on cost of sales and administrative expenses as a percentage of revenue. Keep in mind that large companies and chains will be more efficient since they have greater buying power and economies of scale than a start-up, but you can still use these percentages as goals to shoot for.”

As long as you’re looking for sample business plans anyway, to use as templates for your own plan, keep a close eye for those plans that include startup cost details. You’ll have to adjust for inflation and regional cost differences, but again, a possible place to put you in the right ballpark.

Online cost or other financial calculators can also provide some guidelines if you already have some idea of specific expenses.

And don’t overlook sources that are only available in print: check a library near you for access to titles such as RMA Annual Statement Studies or the Almanac of Business & Industrial Financial Ratios, resources that provide benchmarks for inventory, accounts payable, and many other categories.

(More good work from Sarah --- thanks!)