How to Determine Startup Costs In Three Steps
January 16, 2024
Adam Wakefield

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. 

What are startup costs? 

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.

  • Budgeting and financial planning: Understanding startup costs can help you create a comprehensive budget and financial plan. It ensures that your startup has sufficient funds to cover initial expenses and sustain operations during the early phase.
  • Resource allocation: When you identify the specific costs associated with different aspects of the business, you can allocate resources effectively and prioritise essential expenses.
  • Fundraising and investment: Accurately determining startup costs is crucial when seeking investor funding. Investors often assess a business’s feasibility and potential profitability based on its initial costs and financial projections.
  • Risk management: Analysing startup costs can help you mitigate potential financial risks and challenges that may arise during the initial stages of the business. You can develop contingency plans and strategies to manage these risks effectively.
  • Realistic projections: Determining startup costs facilitates the creation of realistic financial projections, enabling you to set achievable milestones and goals for the business. 

How to determine startup costs 

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.

1. Identify assets

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:

  • Furniture and fixtures: Desks, chairs, tables, cabinets, and other furnishings used to set up an office space. 
  • Vehicles: Automobiles, trucks, or any other vehicles used for transportation or logistical purposes within the business operations. 
  • Land and buildings: Physical property and real estate used for business operations, including office buildings, warehouses, manufacturing facilities, or retail stores. These assets may appreciate over time.
  • Cash: Physical cash held in the form of currency for making immediate payments, managing day-to-day transactions, and maintaining liquidity within the business.

Intangible assets are non-physical resources that generate value for a startup. 

  • Intellectual property: This includes patents, trademarks, and copyrights.  
  • Brand recognition: A startup’s reputation within its target market and industry. 

2. Calculate expenses 

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.

One-time expenses

You must pay one-time expenses during the initial stages of setting up your startup. These include:

  • Incorporation costs: Costs related to business registration, licenses, and legal fees. 
  • Office setup: Costs for leasing office space, furnishing the office, setting up utilities and amenities.
  • Website and marketing: Costs related to setting up your website and initial marketing and advertising activities to introduce your business to potential customers.

Ongoing expenses

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:

  • Rent and utilities: Regular payments for office space and utilities, including electricity, water, and internet.
  • Employee salaries and benefits: Wages, salaries, and benefits for employees. These include payroll taxes, health insurance, and other employee-related expenses.
  • Inventory costs: Variable costs associated with restocking inventory or raw materials needed for production.
  • Advertising and marketing costs: Regular business expenses for advertising campaigns (e.g., paid ads on Google), online marketing (e.g., SEO), and promotional activities (e.g., influencer marketing campaigns) to maintain brand visibility and attract the target audience.
  • Administrative costs: Expenses related to administrative tasks, such as office supplies(e.g., printers, file folders).
  • Software subscriptions: Regular payments for software licenses and subscriptions for necessary business tools and applications (e.g., Salesforce CRM, SAP ERP).

3. Perform financial projections 

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

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

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.

How to determine startup costs for your target African market: The path forward  

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.