As an aspiring startup founder, knowing how to determine startup costs is extremely important. It ensures startup founders are financially prepared and secure funding for their ventures. You have to cover these costs in your startup’s business plan while seeking funds from investors.
Take the example of David. He is an experienced software engineer with 15 years of experience in the industry. He gets a groundbreaking idea – a B2B SaaS solution that could help organisations improve productivity. He decided to launch a startup. However, David’s promising idea might fail without determining startup costs. For example, he may overestimate his needs and allocate resources inefficiently, prematurely running out of money.
A basic understanding of calculating startup costs is necessary for new entrepreneurs like David. Regardless of the type of business you run, this article will help you gain a basic understanding of startup costs to ensure the foundation of your startup is safe and successful.
Startup costs are the expenses that are needed to launch a new business. These include market research (e.g., survey costs), legal fees, and other costs required to develop a product or service.
Determining startup costs is important for the following reasons.
Categorise your startup costs into assets and expenses. This practice is essential for taxation purposes. You can receive tax breaks and deductions for certain startup expenses.
When determining startup costs, you need to identify assets first. Assets are the resources your startup owns to generate revenue. There are two types of assets: tangible and intangible.
Tangible assets are physical assets that you can touch and see. You must record these items in your startup’s balance sheet. They include:
Intangible assets are non-physical resources that generate value for a startup.
Expenses are the costs you pay to fund your startup’s operations, which reduces your net income. You’ll record expenses in the income statement to show the ongoing costs of running your startup. There are two types of expenses: one-time and ongoing expenses.
You must pay one-time expenses during the initial stages of setting up your startup. These include:
Ongoing expenses are regular or recurring costs you must pay to finance your startup’s day-to-day operations. These expenses are essential for keeping your startup operational. Common ongoing expenses for startups include:
Financial projections help you to forecast your business's future revenue, expenses, and profits. There are two widely used methods: break-even point analysis and sensitivity analysis.
Break-even point analysis assesses the minimum level of sales required for a startup to cover all its costs. When startup founders identify the point at which total revenue equals total costs, they can determine the level of sales they need to reach the break-even point.
This analysis is useful for evaluating the business model’s viability, allowing founders to figure out if they have enough financial cushion to cover costs before the startup becomes profitable. A clear understanding of the break-even point for startups looking for funding shows they have financial acumen and also builds trust with investors.
Sensitivity analysis is a technique that helps to evaluate how changes in various external factors and market variables can affect the financial performance and viability of the startup.
For example, a tech startup might analyse the impact of a 20% increase in customer churn rate on the startup’s overall revenue. They can simulate this scenario to determine how many customers might stop paying for the subscription next month and how this will affect the startup. This analysis allows the management to understand the risks associated with customer retention and implement effective strategies for customer engagement and satisfaction.
Determining startup costs specific to your target African market involves meticulously assessing a wide range of factors. These can include market trends, regulatory requirements, and local economic conditions.
If you plan to launch a startup in Africa, Founders Factory Africa can help you determine the exact costs for your desired market and take your startup from concept to in market. Contact us today and get our guidance to build your dream startup.