How to calculate business start up costs

Make sure you have enough money to successfully start your business with our guide to calculating start up costs.

A sure-fire way for any start-up to fail is to simply run out of money.

That’s why creating a solid business plan and working out your business start-up costs is a vital first stage in launching a company.

Having a realistic idea of your start-up costs is essential as it allows you to keep a tight rein on cash flow and reduces the chance of running out of resources before your business has taken off.

And, if you’re looking to take out a business loan, securing the right amount demonstrates sound financial planning and means you won’t have to go back cap in hand if resources get stretched.

Getting to grips with business start-up costs is confusing as people use three key terms interchangeably: start-up costs, start-up assets and start-up financing.

Each has a different meaning but all are essential to creating a strong business plan and raising the right amount of investment needed for your business to become profitable.

Our guide explains the jargon in simple terms and shows you how to calculate start-up costs for your business.

What are start-up costs?

Start-up costs are all the non-recurring costs involved in setting up your business, apart from assets.

Sometimes known as sunk costs they’re the costs that, no matter how much of a success or failure your business is, you can’t get back – they’re ‘sunk’ into the business venture.

Start-up costs cover expenses incurred in getting your business to the point where it’s ready to start selling to customers.

Start-up costs examples

Typical start-up costs examples include:

• Accountant and legal fees – Any money spent on professional services such as an accountant to help with your business plan or solicitor’s fees for activities such as registering your business as a limited company.
• Business registration – Fees such as registering with Companies House, which costs £12 online and £40 via post, as well as fees such as paying for a registered office address, postal scanning fees, business incorporation fees and even setting up some bank accounts and online services such as bookkeeping.
• Pre-launch costs – Money spent on essential materials and services such as logo design, website creation and hosting, signage, marketing materials, menus, posters, renting premises, and any initial recruitment fees required to hire staff before your business opens.

What are start-up assets?

Depending on the nature of your business you may need to buy equipment, machinery, vehicles and stock – known as assets and inventory.

Assets are different from expenses in that they appear on your balance sheet as an asset value and are accounted for differently.

Asset costs and accounting is a complex area but generally an asset is a purchase that still retains its value: if you resold it the business would earn some money back.

This value falls over time as the business uses the asset, which is known as depreciation.

Assets fall under HMRC’s capital allowance scheme which allows a business to offset the cost of the capital expenditure against profits, in turn reducing corporation tax liability.

This currently applies to any capital expenditure up to £1,000,000 in any 12-month period – known as the Annual Investment Allowance (AIA).

For new businesses HMRC offers an additional allowance in the first year of trading, offsetting additional expenditure such as energy-saving equipment and some cars with low CO2 emissions.

It’s worth knowing that you can’t claim the full amount on equipment that you also use for personal use.

For example, if you purchase a laptop for £500 and use it half the time for personal use you can only account for £250 as the business asset that is offset against profits.

Start-up asset examples

It’s a good idea to keep an asset register detailing the assets you’ve purchased along with receipts so you can claim these as capital allowances on your annual tax return.

Typical start-up assets include:

• Equipment – Referred to as ‘plant and machinery’ on a HMRC annual tax return, this is any equipment such as laptops, cameras, computers, printers, office furniture and cars. It’s worth knowing that cars do not fall into the Annual Investment Allowance, apart from some low-emission models.
• Inventory – If you carry inventory or stock – even raw materials such as textiles or wood – then this should be listed as an asset as it has a resell value.
• Cash and operating liquidity – Any funding that’s invested in your start-up (apart from loans or other debts) are generally considered assets and need to be accounted for.

What is start-up financing?

The third pillar of start-up costs that you need to calculate is start-up financing – how much money your business needs to operate until you break even and start generating a profit.

Start-up financing must cover the initial start-up costs, the cost of purchasing assets, and any on-going fixed and variable costs incurred once the business is open such as salaries, utilities and on-going marketing activity.

It should include any interest payable on loans.