Everything You Need to Know About Startup Costs

February 17, 2022

For many entrepreneurs and aspiring business owners, launching a startup is a dream come true. Each year, an average of 96,580 new businesses are created in Canada, with a total of 68.8 percent of those businesses considered small businesses.

Most new businesses incur startup costs to get off the ground. Without sufficient capital, you may have difficulty procuring real estate and equipment or hiring the staff you need to launch your startup.

Identifying your startup costs gives you a solid foundation to build your new Small Medium Enterprise (SME) upon. Securing your finances before you open also increases the likelihood your business will succeed without running into cash flow issues or requiring unexpected capital.

What are startup costs?

Startup costs are the expenses you incur when starting a new business. They represent what it takes to transition a business from an idea to actually becoming a functional, operating company.

Your startup costs are dictated by multiple factors, including the:

  • Type of business you’re opening
  • Industry you intend to operate in
  • Size of your company
  • Equipment, materials, and property you require

To that end, startup costs aren’t one-size-fits-all for all new businesses. The costs you incur to launch your startup will likely differ from those incurred by competitors—or even other businesses in your industry or location.

Why calculate startup costs?

Understanding the unique financial needs of your startup—before you begin—helps you prepare, stay on-target, and mitigate the likelihood you’ll need to incur unplanned debt or make unintended changes to your business plan.

In a way, calculating your startup costs is similar to planning for a new car purchase or buying a house. Figuring out your startup expenses provides you with a framework to work from and helps determine if your idea is financially feasible at every stage, from initial conception to grand opening and beyond.

What is the average cost to start a small business?

According to data analyzed by LendingTree:

  • 21 percent of business owners start a business for less than $5,000 USD
  • 11.5 percent of business owners incur $5,000 to $9,999 USD in startup costs, and
  • 16 percent require $10,000 to $24,999 USD.

However, depending on your industry and specific business needs, startup costs may potentially exceed $3 million USD, though only 0.9% of businesses incurred such significant startup costs.

Additionally, the U.S. Small Business Administration estimates an average startup cost of $3,000 USD for microbusinesses and $2,000 to $5,000 USD for most home-based businesses. While these numbers are based on U.S. data, figures would be similar in terms of spend for Canadian businesses.

Understand what types of costs you’ll have

Business startup costs aren’t all front-loaded at the time you launch your business. Understanding the types of startup costs your business may incur over its lifetime helps you reach and achieve your goals and milestones. 

One-time vs. ongoing costs

Some startup costs are fixed one-time expenses. After making a payment in full, you never have to worry about the cost again. Other expenses are fluid and ongoing, and may even evolve as your business grows.

For example, developing a business plan is likely a one-time expense per business. Though you may be able to write a business plan yourself, it may require significant (and costly) market research to fully map out your expectations, budget, and financial forecast or to see what’s worked (or hasn’t) for your would-be competitors.

In contrast, other startup costs are ongoing. Incorporating your business comes with fees for registration, licensing, inspections, and permits, some of which need to be paid on a renewal basis. Rent, utilities, and subscription fees to required software are also examples of ongoing startup costs.

Essential vs. optional costs

Startup costs for opening a new business may be unavoidable and essential. For example, if you plan to sell merchandise, inventory represents an essential cost that’s likely to make up 17 to 25 per cent of your total budget.

On the other hand, some expenses, such as marketing costs, are optional when you’re first starting out. Instead of spending money on paid ads or billboards, you can instead decide to get creative or take advantage of social media, your network, or word-of-mouth marketing. When the time is right and your budget allows for it, you can then increase your marketing budget to attract new clients or customers.

Fixed vs. variable costs

Some business startup costs are a fixed rate for a set period of time. Utility bills, rent, and insurance are representative of fixed startup costs; you may reasonably set aside a fixed amount of money for each expense without significant changes from period to period.

Variable startup costs differ from one period to the next. For example, a woodworker may require $40,000 of materials in one quarter. In the next quarter, customer demand  may increase, necessitating an increase in the cost of acquiring materials.

Estimate your startup costs

No two businesses are alike. Your unique approach, preferences, and plans all play a role in the total startup cost for your new business. Estimating your startup costs allows you to develop and follow a budget, ensuring you have the money you need for each stage of operating your business. To help you get started, RBC provides a free business start-up cost template.

Determine your startup expenses

Begin your startup cost estimate by listing your expected expenses, including:

  • Rent, real estate, or coworking fees
  • Incorporation, licensing, permit, and registration fees for your industry, city, state/province, and country
  • Equipment, furniture, materials, and tools you require to begin operations
  • Marketing
  • Utilities and insurance
  • Initial inventory
  • Credit and loan repayments
  • Payroll
  • Estimated taxes

Once you compile your list, research the average startup cost for businesses in your industry. Getting quotes from contractors, suppliers, and vendors to put a price on each expense. Consult your local and regional business departments and agencies to determine the combined cost of registrations, fees, and permits your business requires.

Finally, set aside an allotment of funds to serve as an emergency fund. Maintaining sufficient working capital may keep your company afloat if business doesn’t pick up as quickly as you expected, or if you run into any snags along the way.

Identify your startup assets

Your startup may launch with a handful of business assets—items that can be assigned some tangible value. Startup assets may include funds you set aside for startup purposes, land or property owned by your business, vehicles, trademarks, and even intellectual property.

Some of your assets may begin as expenses, such as furniture and equipment. However, once you’ve purchased the items, they, by definition, become business assets.

How to save on startup costs

Starting a business is rewarding, but startup costs are often significant and, in some cases, downright frightening. Making every dollar count is crucial to the success of a new business.

Keeping initial startup costs to a minimum requires some creative and frugal thinking, but is possible. Reduce and save on startup costs by:

  • Purchasing used equipment and tools, or leasing new equipment instead of buying it outright
  • Reducing overhead—for example, operating in a coworking space or working from home instead of renting dedicated office space
  • Reassessing your business plan to scale back planned inventory or services
  • Operating your new business as a side hustle while working in more traditional employment, even temporarily
  • Bartering your goods or services in exchange for goods, services, or discounts from other businesses, partners, and vendors
  • Staying on top of your bookkeeping to track your cash flow, expenses, and receivables
  • Hiring only when your business is capable of supporting new staff

Are business startup costs tax-deductible?

Reasonable and legitimate business expenses are tax-deductible in Canada, including:

  • Advertising and marketing
  • Registration and licensing fees, permits, dues, and taxes
  • Insurance and utilities
  • Professional fees
  • Inventory and supplies

Bear in mind that some purchases are considered capital expenses. Depreciable property must be deducted over time rather than in full in the year in which you made the purchase.

How far back can I claim startup costs?

You may only deduct business expenses in the fiscal period you incurred the cost. In other words, the date you start your business may not necessarily coincide with the date you opened for business.

If you purchase inventory two months before you plan to begin selling products, your start date should be the day you purchased inventory. If this is not the case, the expense will not be tax-deductible.

Are you ready to take advantage of the best government financing options for your business? Major Developments Canada (mdc) has helped more than 500 Canadian entrepreneurs and small businesses find the best options available. If you have any questions about the programs available, please email us at info@majordevelopmentscanada.

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