Many entrepreneurs start a business with little more than a dream and a shoestring budget.
In fact, some business models require very little upfront costs, and at Shopify, we’ve personally witnessed the success of countless entrepreneurs with humble beginnings. But among the small businesses that get their business off the ground and don’t last, more than a third cite a shortage of cash as the reason.
We wanted to understand: How much does it cost to run a business—really? And do aspiring entrepreneurs have any misconceptions about what those costs will look like in their first year of business?
We surveyed 150 aspiring entrepreneurs and 300 small business owners in the US to find out exactly that.
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How much does it cost to start a business?
Small business owners spend an average of $40,000 in their first full year of business. But the costs of starting a business vary greatly and depend on many different factors, like the industry you’re operating in, your business model, the size of your team, your cost of goods, and so on.
We also asked our respondents to take it one step further—we had them look back at their first-year records and tell us how much money they allocated to various business expenses as a percentage of their total budget. To keep it simple, we bucketed the following functions and cost categories to help you budget when starting a new online business:
- Product costs
- Operating costs
- Online store costs
- Shipping costs
- Offline costs
- Staff costs
- Marketing costs
1. Product costs
Product-related expenses are an unavoidable part of running an ecommerce business. Without spending money on raw materials, inventory, suppliers, manufacturing, or patents, you wouldn’t have anything to sell.
Product costs are the biggest expense by a country mile. Our study found that in the first year of trading, product costs account for almost one-third (31.6%) of a small business’s expenses.
They’re not only the most expensive; they also the hardest expense to keep down. Some 21% of businesses said that costs associated with their inventory, such as product testing and receiving and returning defective products, as well as surplus inventory, could quickly rack up bills.
2. Operating costs
Operating costs cover expenses to get your business functional, plus day-to-day running costs to keep your store active. These include incorporation or legal fees, accounting software, and services.
Small businesses spend an average of 11% of their budget on these operating costs. But some 23% of entrepreneurs cited one-time small business startup costs like licenses, permits, and business insurance as unexpectedly costly. They were also surprised that they were charged to incorporate both state-wide and federally in the US.
Plus, in the qualitative component of our study, business owners repeatedly mentioned taxes and accounting as painfully cumbersome—and worth hiring professional help for.
3. Online store costs
When we asked our aspiring entrepreneurs how much they thought their first year of business would cost them, they wholly overestimated in one area: their online store. Aspiring entrepreneurs expected to spend 12% of their budget on online costs in their first year, but they actually spent only 9%.
The perceived cost and complexity of launching and scaling an online business remains a barrier to entry for many aspiring entrepreneurs. But it’s largely unfounded. For Shopify’s part, our core ethos is to enable precisely those entrepreneurs who don’t have coding or design skills to create an online store. And to do so affordably.
Our research corroborates this. Of the 300 business owners surveyed, we found Shopify customers spent an average of $38,000 on their business in the first year, compared to non-Shopify customers who spent an average of $41,000 in their first year.
4. Shipping costs
The process of getting a product to the end customer is an expense any ecommerce company needs to consider. Regardless of whether you’re shipping inventory from your own warehouse or using dropshipping suppliers, around 8.7% of your annual expenses will be spent on shipping. This includes packaging, labels, and shipping insurance costs.
Some34% of businesses cited packaging costs, damaged or returned items, and general shipping fees. This was particularly painful for businesses with low shipping volumes in the early stages.
5. Offline costs
Are you supplementing your online store with in-person sales? There are expenses associated with selling offline, such as stall or table fees, office space, rent, and gas to travel to the location.
How much you’ll spend on this differs depending on whether you have a permanent storefront or use the pop-up model. An online business that sells at the occasional craft market will have much lower offline expenses than one with a permanent brick-and-mortar store. But as a rough guide, the average business spends 10.5% on offline expenses in their first year of trading.
6. Staff costs
When you’re a solopreneur, you have limited resources: They start and end with you. You’re limited to the skills you possess and the skills you’re willing to learn. Many business owners reach a milestone in their career where they need to weigh the financial costs of hiring help with the time costs of doing everything by themselves.
Perhaps unsurprisingly, having employees dramatically increases overall spend. If you choose to go the solo business ownership route, you can spend less than one-third of what businesses with employees spend.
The average business spends 18.8% of its first year’s budget on staffing costs like salaries, benefits, and perks. But companies that reported higher revenue in their first year spent significantly more on team costs—almost one-third of their total budget.
The relationship between revenue and team costs may seem like an obvious one: If you make more money, you can afford to pay yourself and hire employees. But the relationship goes both ways. Adding members to your team can also drive revenue growth.
7. Marketing costs
Marketing is more of an art than a science, and getting the budget exactly right at the beginning is tough. Spend too little, and you won’t get your brand in front of buyers; spend too much, and you’re less likely to hit your break-even point.
When we asked business owners, “How much did marketing account for as a percentage of your overall budget?” we found a significant relationship between marketing spend and revenue. The less money a business made overall, the more it spent on marketing. And the inverse was true too: The more money a business made overall, the less it spent on marketing.
Our findings, as well as findings by experts from the US Small Business Administration, suggest that the sweet spot for a marketing budget for an early stage B2C business is between 7% and 12% of revenue. This should be enough to cover logo, branding, ads, and printed materials.
How to estimate your business startup costs
There are average startup costs to consider when planning your budget:
- Essential vs. optional expenses. Before budgeting for an expense, ask yourself: Is it absolutely critical and something that the business fundamentally needs? Advertising, for example, is something that can help you grow faster—but it’s not essential. Plenty of businesses have grown using free advertising.
- One-time vs. recurring expenses. You’ll only pay once to file patents and have a lawyer help with company formation documents, but expenses like rent, salaries, and software subscriptions are ongoing. Break down your costs into these two categories to help with financial planning over your first year.
- Fixed costs vs. variable costs. Even if your startup costs are ongoing, the price might change from month to month. Utility bills and loan repayments, for example, might stay consistent, whereas production expenses are variable costs that fluctuate depending on how in-demand your products are.
After analyzing trends among high-earning businesses and consulting startup advisers, there is a range that’s advisable to spend on common startup costs in your first year:
- Operations: 10% to 15%
- Product: 28% to 36%
- Shipping: 8% to 12%
- Online: 9% to 10%
- Marketing: 7% to 12%
- Team: 14% to 30%
Remember: starting a successful business is a marathon, not a sprint. Don’t measure the success of your new business by your first-year profitability. Give yourself a runway of 18 to 24 months to get off the ground.
Accepting that your first year of business may not be very profitable is important for both financial planning and mental preparation. Many founders are the last to be paid in their first year, as all of the company’s revenue goes back into the business. That’s perfectly normal.
Spend the first year opening your online store testing, reiterating, and reinvesting your sales back into your business using the above budget guidelines.
How to get money to start a business
- Personal savings
- Financial support from friends and family
- Personal loan
- Merchant cash advance
- Venture capital
What happens if an unexpected event (e.g., a pandemic, a recession, or both) throws off your projections? It’s always a good idea to do some contingency planning and set aside a cash reserve, just in case.
While new entrepreneurs often rely on their personal savings to keep their business afloat in the early days, one-third of respondents reported reinvesting revenue from their business sales to cover their business costs in the first year.
Other business financing options to supplement your initial investment include:
Do you have money saved from previous jobs, businesses, or house sales? Savings are the most popular way to secure funding for a new business. Two-thirds of entrepreneurs polled in our survey said this is how they got enough money to set up their business.
Financial support from friends and family
If you’re lucky enough to have friends and family who want to support your new business, take a loan from them to cover your first year’s expenses. Almost one-quarter (23%) of entrepreneurs go this route.
Banks offer small business loans to help entrepreneurs start their own companies. Some 21% of small business owners choose this option. Just be cautious that if you can’t repay the bank loan for any reason, you’re personally liable.
Merchant cash advance
This type of business loan helps you secure startup funding that you’ll pay back as a percentage of sales. Shopify Capital, for example, lets you keep ownership of your company and automatically repay the loan when you generate new sales.
Crowdfunding is a way to source a large amount of money from a wide pool of people. Platforms like Kickstarter, Wefunder, and Indiegogo help you raise money from investors without having to pay back the loan. However, crowdfunding is a complex and time-consuming process. It can take months to launch a successful campaign.
If you have a unique product, want to grow fast, and you don’t mind giving away equity, venture capital firms can invest in your small business. This option usually comes with much more paperwork, higher commitments, and aggressive growth. But it can give you access to experts alongside cash to get started.
For companies struggling to make sales in their first year, creating a comprehensive financial plan with how much you’re going to need and how you’re going to use it will make it easier when you’re applying for a small business loan or trying to attract investors.
Don’t think of this as taking on debt: startup expenses are necessary to generate revenue, so the return on your investment will likely be greater than the upfront costs.
How much does it cost to start a business FAQ
How can I start my own business with no money?
Many businesses can be started with little to no money. Try a dropshipping model, selling digital products, or starting a print-on-demand business, as these do not require you to hold inventory. Any business you can start from your home will save you overhead so that you can bootstrap its growth.
How much money should be saved to start a business?
The answer depends on the type of business you want to run, the business model, and the costs associated with starting that business. At the low end, you will likely want a few hundred to a thousand dollars to cover the cost of an ecommerce site, marketing costs, and basic supplies you need to operate.
How much does it cost to keep a business running?
You will have fixed expenses and variable expenses—and these can vary from business to business. For instance, these amounts will be higher if you operate from a dedicated facility (think rent, utilities, wages), or need to buy and hold inventory. Writing a business plan at the start will help you understand your cash flow and costs of keeping your specific business running.
What are examples of start up costs?
- Website fees
- Professional fees (for permits or accountant services)
- Lease deposit
- Marketing fees
- Printed assets
- Packaging and shipping materials
- Staffing costs