1. Understand your costs
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 your business will incur different types of costs, including:
Direct costs - costs that are directly linked to producing your product or delivering your service, such as raw materials, manufacturing supplies, direct labour wages, etc.
Indirect costs - costs that are not directly linked to producing your product or service, but that are still necessary to run the business - e.g. rent, utilities, insurance, admin, staff wages.
These costs can be fixed or variable:
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, equipment leases, loan repayments, etc.
Variable costs - costs that change in proportion to the volume of items you produce or sell, such as raw materials, packaging costs, card processing fees, etc
However to get to the point of launching, businesses usually also have some upfront costs. Here we look at a few of the main costs you need to factor into your planning.
2. Exploration costs
These are the costs associated with investigating and testing potential markets and opportunities before you start generating revenue - so they will be incurred before you start to bring in any cash.
This can include carrying out market research, developing prototypes, and testing your concepts.
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.
3. Formations fees
Company registration costs
If you set up a limited company or partnership 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.
Banking
You may also have a small monthly fee for a business bank account and associated deposit.
Patent and intellectual property fees
If you need to protect your intellectual property, you may need to pay fees associated with setting up trade marks, patents and design rights or in getting expert advice from a qualified professional in this area.
Digital presence and marketing
In the pre-launch phase you need to think about setting up your digital presence 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 marketing and sales section to find out more about how to use marketing and social media when starting up.
4. Business 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
5. 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.
6. Buying stock
If you need to buy stock or materials for production, 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 that the cost of buying and shipping your stock is likely to increase, so you must factor in reserves for this.
7. Compliance 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, minimise 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.
8. Business insurance
Most businesses will need some form of business insurance.
Any motor vehicles used in your business will need to be insured for business use (rather than just personal use).
Your business may also need 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.
9. Plan for growth
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.
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.
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