Many business owners start their enterprises on a small budget and with nothing more than a dream. In truth, some business ideas require very little in the way of initial investments, and at Shopify, we've personally seen the rise to the success of numerous business owners from modest backgrounds. Nevertheless, more than a third of small businesses that start out but fail do so due to a cash flow problem.
We wanted to understand:Â how much does it Cost to Start a Business. And do budding business entrepreneurs have any misunderstandings about what those costs would look like in their first year of operation? To find out more about this, we polled 300 small business owners and 150 prospective entrepreneurs in the US in October.
How much does it cost to run a business?
Our data shows that small business owners spend, on average, $40,000 during their first full year of business. Additionally, we asked our respondents to go a step further by telling us how much money they had allotted to certain business costs as a proportion of their overall budget. To do this, we asked them to look at their first-year records. To keep things simple, we divided the following tasks and expenses into buckets:
- Operating: incorporation/legal fees, accounting software, services, etc.
- Product: raw materials, inventory, supplier, manufacturing, patents, etc.
- Shipping: packaging, labels, etc.
- Online store: website/platform subscription, hosting and domain name, contract developer/designer, etc.
- Offline: stall/table fees, office space, rent, gas, etc.
- Team/staff: salaries, benefits, perks, etc.
- Marketing: logo, branding, ads, printed materials, etc.
📊 What our research shows
In their first year, small businesses spent:
- 11% on operating costs
- 10.3% on marketing costs
- 9% on online costs
- 31.6% on product costs
- 8.7% on shipping costs
- 18.8% on team costs
- 10.5% on offline costs
The amount firms spent in their first year varied widely, based on things including the industry and business strategy, whether the business was a full-time, part-time, or hobby endeavor, and if the business had extra workers. But more on that later.
Sources of financing for early-stage founders
While new business owners often use their own funds to fund their operations in the beginning, one-third of respondents said they reinvested profits from their company's sales to pay operating expenses in the first year.
📊 What our research shows
Top funding sources for business owners:
- Personal savings (66%)
- Reinvesting sales revenue (30%)
- Financial support from friends and family (23%)
- Personal loan (21%)
Respondents could select more than one funding source
👀 Why it matters
It's crucial for both your financial planning and your emotional readiness to acknowledge that your business's first year may not be very lucrative. Since all of the company's revenue is reinvested in the business in the first year, many founders get their compensation at the end of the year. That is entirely typical.
A thorough financial plan that details how much money you'll need and how you'll spend it may help businesses that are having trouble generating sales in their first year, whether you're attempting to get investors or applying for a small business loan.
Don't think of this as going into debt; because initial costs are required to produce revenue, your investment will probably provide a higher return than the upfront outlay.
How much businesses spend in their first year
Having employees significantly raises total spending, which is maybe not unexpected. Less than one-third of what organizations with employees spend may be saved if you decide to spend on a solo business.
📊 What our research shows
- In their first year, entrepreneurs with no employees spent $18,000.
- In their first year, business owners with one to four employees spent $60,000 (including salaries).
Unexpected costs in the first year
Beyond fixed costs, business owners also mentioned typical one-time charges that appeared in their first year of operation and warned consumers about hidden costs to look out for.
📊 What our research shows
The most-cited unexpected costs of running a business were:
- Shipping: Businesses cited general shipping prices, damaged or returned items, and packing costs in 34% of their responses. In the beginning, this was especially onerous for businesses with small shipping volumes.
- Legal:Â One-time beginning costs for new businesses, such as licenses and permits as well as business insurance, were cited by 23% of businesses as being surprisingly expensive. They were also taken aback by the need to incorporate it in the US on both a state and federal level.
- Inventory and product: According to 21% of businesses, costs related to their inventory, such as product testing, receiving and returning damaged goods, and excess inventory, may rapidly add up.
- Taxes and accounting: Business owners often identified taxes and accounting as being excruciatingly difficult—and worth employing expert assistance for—in the qualitative portion of our survey.
👀 Why it matters
Your financial plan should also take into account hidden costs, one-time costs, and variable costs in addition to recurring spending and fixed costs. What happens if your predictions are inaccurate due to an unforeseen catastrophe (such as a pandemic, a recession, or both)? Planning for the unexpected and keeping a financial reserve on hand are always wise moves.
Aspiring entrepreneurs overestimated online costs
When we asked prospective entrepreneurs how much they believed their first year of business would cost them, they completely overestimated in one area: they assumed online costs would be higher than those reported by existing business owners.
📊 What our research shows
- In their first year of business, aspiring entrepreneurs planned to spend 12% of their budget on online costs.
- In their first year, business owners reported spending only 9% of their budget on online costs.
👀 Why it matters
Entrepreneurs who anticipate spending more to launch a business may wind up shelling out more money than necessary. The justification is straightforward: if business entrepreneurs expect to spend more money on a service, their willingness to pay for that service will increase proportionally.
Many ambitious entrepreneurs continue to face barriers due to the perceived cost and difficulty of starting and growing an online business. But the majority of it is false. For Shopify's part, our primary goal is to make it possible for business entrepreneurs who lack the technology or design expertise to start an online store. and to do it on a budget.
This is supported by our research, which revealed that among the 300 business owners we interviewed, Shopify customers spent $38,000 on average in their first year, as opposed to $41,000 for non-Shopify customers.
Spending patterns among high-earning businesses
It doesn't always follow that a business owner's budget management strategy from the first year was the best one. The majority of our respondents acknowledged that they would have used their money differently in their first year if they could go back in time.
We chose to take a closer look at the data of businesses that reported greater profits in their first year to determine which actions may have contributed to their financial success and to give better suggestions for prospective entrepreneurs. Here is what we discovered:
High-earning businesses spend more on team costs
Businesses with greater first-year revenue spent much more on team expenses—nearly one-third of their whole budget.
📊 What our research shows
- For businesses with annual revenue under $10,000, team costs spent 8% of the budget.
- Businesses whose annual revenue ranged from $10,000 to $100,000 spent 23% of their budget on team costs.
- Businesses that generated more than $100,000 in annual revenue spent 32% of their budget on team costs.
👀 Why it matters
It may seem clear that revenue and team costs are related: if you earn more money, you can afford to pay yourself and add staff. Although there is a two-way street in this relationship, growing your team may also result in more revenue.
Additionally, although going it alone initially makes business sense, it's worth keeping in mind that this strategy has limitations. As a solopreneur, your resources are constrained since they begin and end with you. The abilities you already have and the ones you're eager to acquire are your only options.
When they reach a certain point in their business costs, many business owners must decide if it is more cost-effective to hire assistance or to do everything themselves.
Entrepreneurs must be aware of the warning signs that point to the need for hiring assistance. Turning down work because you can't keep up, seeing a decline in the quality of your output, such as a product or service, or observing a decline in the quality of your sleep or mental health is some warning signs.
Do not overextend yourself to the point where you are unable to manage your business sustainably.
Businesses that made less in their first year spent more on marketing
When we questioned business owners, “What proportion of your overall budget did marketing represent?” We discovered a significant relationship between marketing spending and revenue.
The more money a company spent on marketing, the less money it made overall. And the opposite was also true: the less a business spent on marketing, the more money it made overall.
📊 What our research shows
- With less than $10,000 in yearly revenue, businesses spent 13% of their budget on marketing.
- Businesses that generated between $10,000 and $100,000 in yearly revenue spent 7% of their budget on marketing.
- Businesses that generated more than $100,000 in yearly revenue spent 7% of their budget on marketing.
👀 Why it matters
A website that doesn't convert, or even worse, a poor product-market fit, might be early signs of more serious issues if you're splurging on marketing without seeing a clear return on investment. Business owners must relentlessly monitor, document, and review their marketing efforts regularly.
Nevertheless, setting a budget right at the beginning is challenging because marketing is more an art than a science. Spend too much, and you're less likely to reach your break-even point; spend too little, and you won't get your brand in front of consumers.
Our research and that of experts from the US Small Business Administration point to a range of 7% to 12% of revenue as the ideal range for a marketing budget for an early-stage B2C company.
Our budget recommendations
Once again, the price of starting a business varies widely and depends on a wide range of factors, including the sector of the economy you operate in, your business strategy, the size of your team, your cost of goods, etc. In the end, how you spend what you have in your first year matters more than whether you spend the right or wrong amount of money.
However, after studying patterns in high-earning businesses and consulting with startup advisors, it appears that there is a general range that is recommended to spend in each cost area in your first year:
- Operations: 10%–15%
- Product: 28%–36%
- Shipping: 8%–12%
- Online: 9%–10%
- Marketing: 7%–12%
- Team: 14%–30%
Always keep in mind that starting a great business is a marathon, not a sprint. Therefore, you can't use your new business's first-year profitability to gauge its success. Give yourself between 18 and 24 months to start going. During the first year after launching your online store, use the budget guidelines above to test, replicate, and invest your sales back into your business.
A certain appetite for risk is necessary to be an entrepreneur. But you can prevent a lot of the financial blunders that new business entrepreneurs make if you have the right knowledge and a clear understanding of your financial objectives. Additionally, handling all the other moving components is much simpler with the right ecommerce platform.
The cost to start a business FAQ
It's possible to launch a lot of businesses with little or no money. You may avoid holding inventory by using a dropshipping model, selling digital goods, or starting a print-on-demand business. Any business that you can start from home will allow you to bootstrap its expansion by saving you money on overhead.
The answer will vary depending on the kind of business you want to start, your business plan, and the business's costs. On the low end, you'll probably need a few hundred to a thousand dollars to pay for an e-commerce site, marketing costs, and the essential supplies you'll need to operate your business.
You will incur both fixed and variable costs, which might differ from one business to the next. These sums, for instance, will be higher if you need to acquire and maintain products or operate from a specialized building (including rent, utilities, and salaries). You may better comprehend your cash flow and business costs if you start by writing a business strategy.
Website fees, professional fees (for licenses or accountant services), a leasing deposit, inventory, marketing fees, printed assets, packing and shipping materials, employee costs, and supplies are a few examples of start-up costs.
