8 tips on identifying the main costs when starting a business

You have a business idea, and you have decided you’d like to develop a business plan. An important part of planning is understanding the costs involved in setting up your business, and how to cover these - whether that is through your own funds, or through one or more types of finance including grants, loans or investment.

In times of inflation and rising energy costs, it’s particularly important to factor in potential cost increases and understand how different scenarios could impact your future cashflow.

Once you begin trading you will incur direct and variable costs, for example if you are creating and selling a product, this will include the cost of raw materials and the labour needed to create it.

However to get to the point of launching, businesses usually have some upfront costs:

• Fixed costs - costs you will incur no matter how many items you produce or sell and that you can’t suddenly reduce or stop paying, for example, your rent.

• Operating costs - costs you will incur to be able to function, such as wifi, office expenses, energy, web hosting and travel, where there may be some flexibility.

Here we look at a few of the main costs you need to factor into your planning.

1. Start with your exploration costs

These costs are all pre-revenue so will be incurred before you start to bring in any cash. There’s a lot of exploration you can do yourself by building up a picture of your target market and using free resources such as the Business Gateway Market Reports and our Research service. You will also be able to carry out your own competitor research. However, you may still need more help with bespoke market research supported by an agency or consultant, or the development of a prototype for testing, which will involve paying fees.

2. Before you start trading

If you set up a limited company you will incur some small company formation costs.

You may need support to complete the paperwork and this will involve some cost - ranging from a small amount for a basic online service, up to several hundred pounds for professional advice.

If you don’t want your home address to be publicly available through Companies House, you can pay for an address hosting service by using a formation agent, solicitor or accountant.

You may also have a small monthly fee for a business bank account.

In the pre-launch phase you need to think about creating your digital ‘shop window’ and allow for any costs of creating your logo, business cards, website, social media, plus any advertising or launch events so your customers can find you (this could be digital marketing via paid for social advertising or leaflets/posters, etc.).

It is possible to launch a business with a relatively low spend on these elements while you test your business model. There are platforms available, with some free options - such as Canva – which you can use for branding or you might choose to engage with someone to do that for you. You’ll also need to include the cost of website hosting and licenses for any software you’re planning on using. Check out our digital skills section to find out more about how to use digital marketing and social media when starting up.

3. Do you need physical premises?

It is possible for founders of many types of business to begin trading from home, and this can be a good way to keep costs down in the early days, especially when a proportion of your energy bills can be allocated to the business, which is more tax efficient.

However many types of business are not permitted to trade from residential premises and for others it’s just not practical. When taking on premises e.g. a shop or an office, there are many costs you need to factor in:

• surveyor and legal fees whether renting or buying, and any related deposits

• fitting out with furniture or equipment

• installation of your digital infrastructure including your wifi and/or landline

• ongoing maintenance

• business rates

• energy costs

4. Don't forget to include all your equipment and supplies

This could simply be a laptop initially (for example if you’re a consultant offering your services from home). However, depending on your business, you may also need to consider printers, stationery, signage or livery for your vehicles, any machinery or equipment needed. You’ll also need to factor in the costs for tech, such as point of sale (POS) and payment services, data storage and back-up, as well as software licenses and mobile phone contracts.

5. Plan ahead if you'll need to buy stock

If you need to buy stock sell or materials for productions, plan ahead to establish what you need, and add in that cost. It’s expensive to have too much stock or raw materials, but not having enough can cause issues too. Be aware that when you are starting out, suppliers may insist on payment up front rather than longer payment terms of 30 days. Over time, by paying promptly, you may be able to build good relationships with suppliers which can help cashflow if they agree to longer payment terms. In times of financial crises or high inflation, you will also need to consider the fact that the cost of buying and shipping your stock is likely to increase, so you must factor in reserves for this.

6. How will you comply with regulatory and legal requirements

All businesses must keep accurate financial records and submit annual accounts. There are many relatively low cost accountancy software options and some may even come free depending on the provider of your business bank account. It’s worth checking them out first as using one of those could save you money by removing the need for an accountant or bookkeeper or, at least, minimising the time required.

HMRC has a page outlining some different accountancy software options.

Almost all businesses will handle some level of personal data and will need to register with the Information Commissioner’s Office and pay a small annual fee around £40. You can go through a self-assessment process to check if you may be exempt from this.

Different industries may have fees associated with certificates and inspections required for health and safety or food hygiene before you begin to trade, so check if that will be applicable in your business.

Finally be aware of new regulations, taxes and policies which may be on the horizon and could affect your forecasts, particularly with the push to Net Zero. Examples include tourist taxes and the workplace parking levy.

7. Every business needs insurance

Any motor vehicles used in your business will need to be insured for business use (rather than just personal use).

It is seen as good practice for businesses to have public liability insurance. If your customers are public sector organisations, they will insist on this type of insurance, as will many private sector businesses, or event organisers if you have a stand at their event.

Other types of insurance will depend on the circumstances of your business, products and services:

• If you have employees, you are legally required to have employers’ liability insurance and can be fined for every day you are not covered.

• If you provide a professional service then professional indemnity is sensible.

• Building insurance is important (and is likely to be a condition of the loan if you have a mortgage).

• Building contents insurance and portable equipment insurance (for laptops etc.) could give peace of mind.

• With the growth in cyber risk, cyber liability insurance is increasingly popular, with some providers offering training and support in this area too.

• If you are looking for investment, investors may expect to see directors’ and officers’ liability insurance which provides cover for the business leaders for claims against them.

Companies house has a useful short guide on the main types of business insurance.

8. Think about the future

Other than stock, the biggest costs for any business are premises and staff. Although you may not have either at the start, it’s helpful to forecast what these might be as your business grows, to work out when your business could potentially break-even – and then start to make a profit! Again, consider how these could be impacted in the future due to increasing staffing and energy costs and rising inflation. Download our free business plan template to help get you started.

Where next?

Starting up can be a daunting process, but you don’t have to do it on your own. Get in touch with your local Business Gateway office and they can help you work out the costs involved with bringing your idea to life.