Even in today’s troubled financial times, there has been no shortage of individuals looking to ‘go it alone’ on the business front. Hence, the number of new start-up companies has steadily increased in recent years. But what is the true cost of being your own boss?
Venture capital fund manager and Seed EIS provider, Mercia Fund Management, explores the costs of starting a business in the current economy, highlighting the hidden costs overlooked by many entrepreneurs.
The Cost of Starting Up
According to a recent survey by mobile phone provider O2, the average cost of starting a small business comes in at £17,096 / $28,311, which may be a hefty price tag for those looking to make the move from employment to self-employment. Generally during the first year, this cost cannot be passed on to your customers via increased fees for services or prices for goods. Thus, it makes it all the more necessary for start-up business owners to become savvy and cost-effective from the outset in order to lower overheads and improve profitability now and in years to come.
The cost of starting up in the first year can be extremely daunting for those looking to run their own company. Understanding where your money goes is the first step to managing funds during these vital initial years and, especially, when your business has become more established. These costs can be broken down into two categories : one being the visible and expected outgoings; and the other, being the hidden costs that are common occurrences in the early years.
Visible costs of setting up and running your own business include salaries for you and other members of staff, overtime pay (this is particularly common in the initial year of business!), the recruitment costs of professional consultants such as PR, advertising and legal agencies, equipment purchases, utilities (i.e. office rental, electricity and other expenditures), office supplies and maintenance.
There are evidently more hidden costs to running your own business than there are visible outgoings. However, the sheer scale of these costs still doesn’t mean they are considered by start-up business owners who may not have experience on finance side.
Hiring employees present a number of hidden costs for start-up businesses. That’s why it advisable that you keep the number of staff low but recruit dedicated and passionate managers to lead your fledgling team. Employee turnover can be particularly costly, as every time your business recruits or replaces a member of the team, time and money must be spent advertising the role, conducting interviews and managing a training program. Sick pay, inefficient means of communication, low employee motivation, over and under-staffing and ineffective performance management are also hidden costs that contribute and decrease the profit margins of start-ups.
Investing in staff development, however, will be integral to the growth of your business. But this must be completed and managed in a budget-conscious way to boost employee interaction, upgrade skills level and enhance performance, as well as profitability.
Equipment is also an area that must be appropriately managed to eliminate or reduce hidden costs. When investing in start-up equipment, it may be all too tempting to cut corners in order to lower costs. However, investing in decent equipment from the outset will reduce the risk of costly downtime, and in turn, decrease any associated maintenance costs.
Taking some time to consider the true cost of starting and running your own business is an essential step in improving profitability. Thereafter, taking those next vital steps into business development will follow confidently without start-up regret.
This post was written by Brittany Thorley. Brittany regularly blogs across the web to help startup businesses understand their finances and further secure their future. By day, she works for venture capital firm Mercia Fund Management.