One of the first questions aspiring entrepreneurs ask is, “How much will it cost me to start a business?” Start-up costs are incredibly hard to ballpark. They vary widely by sector, location, and what you’re going to sell.
There are also different types of costs: one-off, fixed, variable, essential, optional, and unexpected. The UK’s favourite company formation agent, 1st Formations, explains these common expenses below.
It’s not just what you’ll need to spend money on when starting a business, but also the type of costs. Different classifications determine whether it’s a one-off, ongoing, or changeable expense, and knowing the difference between them will help you budget appropriately.
One-off business costs
As the name suggests, these expenses are not repetitive. They arise from non-operating activities like company registration and purchasing tools and equipment. Your one-off costs when starting a business should generally be quite low, but it depends on your industry, as some may need to invest in costly machinery.
However, company registration starts at just £52.99 with 1st Formations, and packages include many freebies, like a domain name and the filing of your first confirmation statement, helping to bring your start-up costs down.
Fixed costs
Fixed business costs are ongoing, such as utility bills, rent, payroll, and so on. They can be payable daily, monthly, quarterly, annually, or at any other pre-agreed intervals. These regular expenses will be some of your highest costs when starting a business and can vary enormously depending on your location.
In London, for example, office rent and utilities will cost considerably more than in northern parts of the UK. Or if the nature of your business allows you to work from home, then you’ll only need to cover the commercial part of your household bills, and so your fixed costs will be much lower.
Variable costs
Variable business costs are conditional on production and change over time. They include the price of raw materials, packaging, and shipping, for instance. Essentially, these expenses depend on how much it costs to make your products, so if production volume increases, so do your variable costs.
When researching your business idea and putting a business plan together, you should calculate what your variable costs are likely to be. The formula for working this out is:
(Cost per unit) x (total number of units) = total variable costs
Essential costs
These are your non-negotiables. Your business will need these investments to operate day-to-day and evolve and grow sustainably. Research and development, relevant software, recruitment, stock, and transport are some of the costs that fall into this category.
As a registered company, you’ll also have to meet certain legal requirements, such as filing annual accounts and confirmation statements and obtaining certain insurance policies, licenses, and permits. These are some other compulsory costs you’ll need to factor in when starting a business.
Optional costs
Unlike the above, these are your non-essential business costs, like employee benefits, website optimisation, and optional business insurance. For example, business equipment insurance is beneficial to have as it protects your professional tools and machinery, but it’s not a legal requirement.
You should make optional purchases only once your essentials are covered, and you have an adequate emergency fund. If you’re in a position to make these discretionary investments, they can be instrumental in strengthening your business.
Unexpected costs
Lastly, every business inevitably comes up against hurdles. This is why you need an emergency fund, which will help you cover unexpected costs in case something doesn’t go according to plan or some things turn out to be more expensive than anticipated.
When starting a business, you should have a business plan in place, which will help you understand the different expenditures you might have in the first two to three years. But no matter how well you plan, it’s vital to always plan for contingencies.
The bottom line
Although it is difficult to provide numbers, starting a business doesn’t have to cost the earth. Especially considering the popularity of home-based and digital businesses, you can eliminate some of those chunky expenses like commercial rent and utilities.
If you’re ready to start a business, choose the UK’s number one company formation agent, 1st Formations. With packages starting at just £52.99 and an expert secretarial team, they can help you save both time and money when starting and running a company.
