When it comes to the costs of starting a business, entrepreneurs often learn quickly that the financial realities of doing business don’t always match initial expectations.
More specifically, small business owners reported spending more than twice as much in their first year than they had anticipated.
We needed to know: Where did their forecasts go wrong? Did they overspend in certain areas? And what could they have done to reduce costs?
Turns out, there were some financial missteps almost all founders reported making in their first year—and most of them were avoidable. While it is recommended to avoid taking business loans where possible, if you have done enough financial planning and are sure that business loans can help grow your business, check our guide on how to get a business loan to get started.
To help you avoid these same pitfalls, we interviewed successful Shopify store owners to find out what they would’ve done differently in their first year and what financial advice they’d give new entrepreneurs. We also pooled the top resources from our blog so you can dive deeper into each topic. If you’re starting your own business, you’ll want to keep this list handy.
Table of Contents
1. Don’t skip financial planning
The first step to hitting your financial goals is actually writing them down. This might sound obvious, but many first-time entrepreneurs find the process of writing a financial plan either too overwhelming or unnecessary in the early days, so they skip it altogether. If you’re tempted to do the same, think again.
Creating a financial plan forces you to take inventory of where you are right now, where you want to be, and how you want to get there. It also helps you make better decisions in a pinch, and forces you to remember the big picture when you’re feeling bogged down by the day to day of entrepreneurship.
“You have to figure out how much the company is going to need to survive for the first six months, the nitty gritty,” says Baxter Snider, founder of Olives and Applesauce. “What do you think your sales are going to be with that? What do you hope your sales are going to be? What’s going to happen if you don’t hit that? What happens if you go viral and you exceed that? You need a backup plan for both scenarios.”
What’s more, just the process of writing a financial plan can save you money. Financial planning isn’t just about forecasting or predictions either. Even the simple things, such as opening a business bank account or taking time to understand financial statements go a long way toward potential business success. Managing finances isn’t the most glamorous of business-building tasks, but it remains essential nonetheless.
Our research found that businesses who reported using financial plans and budget kept costs down and made more money in their first year.
- How to write a financial plan
- A detailed guide to writing a useful business plan
- Business plan template: A framework to streamline your next business plan
2. Grow your network
Generally speaking, the bigger your professional network, the better. Every person you meet could be a potential adviser, customer, or partner. And in the early days, it can actually help you cut costs significantly by turning your time and skills into currency. For example, Baxter Snider traded one of her products, a baby carrier, in exchange for free product photography in the early days.
Not to mention, the easiest way to accurately forecast how much money you’ll need to invest in your business is to talk to people who have started similar businesses, or who advise those businesses. Accurate financial projections can be the difference between finishing the quarter strong and not having enough funds to remain open next month.
Some tips for building relationships with like-minded entrepreneurs and small business advisers:
- For starters, take charge of your personal Facebook, Instagram, and LinkedIn pages, letting your network know of your new business venture, what help you might need, and what you’re offering in return. Join Facebook and LinkedIn groups that are relevant to your business or industry, as well as more general groups related to small businesses.
- SCORE’s mission is to support small business communities through mentoring and education. In the US, it has a huge network of volunteer expert business mentors and has helped more than 11 million entrepreneurs since 1964.
- Coralus is one of the strongest networks and communities for supporting women and non-binary founders.
- Backstage Capital is a community of investors, mentors, and entrepreneurs focused on supporting Black founders and underrepresented groups in entrepreneurship.
- Shopify's Build Black is an ongoing conversation series that brings leading Black business minds together to discuss getting started and keys to success.
- The Fireweed Fellowship is an accelerator and hub empowering Indigenous entrepreneurs in Canada with courses, mentorship, professional coaching and much more.
- As the world opens back up, Meetup.com makes it easy to find local groups of entrepreneurs, whether they’re operating in your industry or talking through specific issues. Browse topics like “Small Biz” and “Small Business Owners” to find meetups near you.
Those who have gone down the road before you can offer incredible insight into how to improve your startup's financial health. Experienced entrepreneurs in your network are a treasure trove of knowledge and insight. From business finance best practices to financial management tips, one or two of the right connections can make all the difference.
3. Familiarize yourself with free tools and apps
Every small business owner wishes they had more time and resources at their disposal. But free goes pretty far these days. Don’t hire employees or buy pricey software until you’ve tried some tools out yourself and know exactly what you’re looking for. In the early days, just focus on experimenting, seeing what works and what doesn’t, then rinse and repeat.
Some popular free tools and apps you want to check out:
- Hatchful helps you create professional looking logos and social media assets, without any design experience.
- Burst allows you to browse and download free, high-resolution photos for your website or commercial use.
- Xero and FreshBooks both offer accounting, invoicing, and payroll services built for entrepreneurs, with 30-day free trials and plans starting as low as $9 per month.
LEARN MORE: If you’re just getting started, Shopify’s list of Free Business Tools includes everything from logo makers to purchase order templates. And if you’ve already decided to launch your store on Shopify, the Shopify App Store has thousands of free apps to help you grow your Shopify business.
- Best video editing tools for small business owners
- How to capture your own high quality product shots
- Small business accounting software
- 27 best free Shopify apps to grow your Shopify store
4. Invest in product research and validate your idea
With your product idea in mind, you may feel inclined to leapfrog ahead to production, but that can become a huge financial drain if you fail to do any product research or validate your idea first. Understanding the logistics of business operations before you go all-in on your idea is incredibly important. Your new business doesn’t start until you’ve actually validated your idea.
If you’re manufacturing your own product, you should be spending the better part of your first year investing in research and development. And once you have a prototype, you need to validate that other people will love it just as much as you do. Product validation ensures you’re creating a product people want and will pay for, so that you don’t waste time, money, and effort on an idea that won't sell.
There are several ways you can validate your product ideas, including:
- Talking about your idea with family and friends
- Sending out an online survey to get feedback
- Starting a crowdfunding campaign
- Asking for feedback on forums like Reddit
- Researching online demand using Google Trends
- Launching a “coming soon” page to gauge interest via email opt-ins or pre-orders
In the same Cost of Starting a Business study, we found that companies who didn’t spend enough time on product research and validation, and jumped ahead to branding and marketing their product, spent twice the amount of money when they had to inevitably revisit their product designs later.
“In hindsight, we should have taken a step back and figured out how to design our [swimsuits] the right way,” says Marcia Hacker, founder of Sauipe Swim. “We rushed and I’ve had to spend a lot of years making up for it—and financially I’m still paying for a lot of those early mistakes. We were investing so much on packaging and product photography, without having the foundation there. We got distracted by the shiny stuff. So, number one lesson: Don't rush product research. Evaluate your market. Follow successful competitors for a few months and see how they do things. Then invest in the shiny things.”
"Number one lesson: don't rush product research. Evaluate your market. Follow successful competitors for a few months and see how they do things. Then invest in the shiny things."
- How to develop a new product (from concept to market)
- How to validate your product
- How to conduct a competitive analysis
5. Keep your marketing budget low and track obsessively
Startup marketing is tricky, especially if resources and expertise are limited. And even if resources aren’t limited, pumping money into paid ads doesn’t guarantee you sales.
In our research on the cost of starting a business, we found that businesses that spent more on marketing in their first year earned less revenue. As a rule of thumb, you’ll want to spend between 5% and 8% of your total budget on marketing in your first year.
In our Cost of Starting a Business research, we found that businesses who spent more on marketing in their first year earned less revenue.
Make sure you’ve covered the following bases before running any sophisticated campaigns:
- Choose the right social media channels for your brand. And once you’ve chosen your platforms, make sure your brand is showing up consistently and constantly on all platforms.
- Optimize your website for sales. It only takes a second for a customer to form an impression of your website. Everything from your homepage navigation to your site speed to your checkout experience needs to be on point.
- Grow your email list. You can link to offers on your website that capture email signups (e.g. 15% discount for signing up), or use your social media accounts to host a free giveaway in exchange for contact information. You can even start doing this pre-launch with your “coming soon” page.
- Reward loyalty. It’s more affordable to make money from loyal customers than it is to find new customers. Consider a VIP program for your loyal customers, or offer them discounts for referrals.
- Cross promote with complimentary brands. Cross promotion allows you to partner with related businesses who can market your services in exchange for you marketing their services—at no cost to either of you.
- Get to know micro-influencers in your market. Are there any local influencers in your space who might be interested in your product? Offer them some freebies in exchange for a mention on their platform.
- Identify key performance metrics (and track them). You’ll want to get familiar with Google Analytics to see how your website is performing and where you’re losing customers. And if you’re running paid campaigns, calculating customer acquisition costs is one way to see if your marketing efforts are working.
- How to build your own brand from scratch in 7 steps
- How to write product descriptions that sell
- Customer acquisition: How to profitably gain new customers for your business
- Driving traffic but no sales? Here's how to diagnose and improve your store
- Marketing in Shopify: Grow your business with Facebook and Google ads
- The beginner's guide to analyzing Shopify reports and analytics
6. Understand your shipping strategy
In the era of free shipping, smaller merchants are getting squeezed in their attempt to stay competitive with the likes of Amazon. Where big brands with high shipping volumes can negotiate lower rates with carriers, small businesses with lower shipping volumes have no bargaining power.
Typically, that means they have to settle for high rates and absorb the shipping costs if they want to offer their customers affordable shipping.
So, before you do anything, ask yourself:
- Are you going to pass the full cost of shipping to your customer, charge a flat rate, or absorb the shipping cost yourself?
- Are you going to get free packaging from a carrier or use branded packaging?
- Are you going to ship internationally?
- Are you going to insure and track packages?
How you answer these questions impacts your overall costs, so understanding them early on will ensure you allocate enough money for shipping.
Normally, small business owners have to negotiate rates themselves with each carrier individually. At Shopify, we recognize that shipping is an extremely challenging aspect of running a small ecommerce business, so we’ve given our customers a leg up with Shopify Shipping. Right now, that means that Canadian merchants get negotiated rates with Canada Post, and US merchants get negotiated rates with DHL Express, UPS, and USPS.
Shipping at low volumes directly through FedEx or USPS was way more expensive than I expected. If I could do it again, I would go straight to Shopify. I would've saved a lot in shipping costs.
Save with Shopify Shipping
When you ship with Shopify Shipping, you get access to pre-negotiated rates with carriers in the US, Canada, and Australia and you can manage your entire shipping process in one place.Get started with Shopify Shipping
- The beginner’s guide to ecommerce shipping and fulfillment
- Shopify shipping services
- International shipping: Everything you need to know
- How do I price and implement a strategy to handle returns?
- How to reduce shipping costs as a small ecommerce store
- 8 independent businesses share their sustainable packaging and shipping solutions
7. Understand your tax obligations (or hire someone that does)
Tax laws and regulations are complex and can change often, so staying on top of your tax obligations is critical if you want to avoid penalties or hefty fines. More than that, understanding tax laws means you can take advantage of some real cost savings.
There are many ways for small businesses to legally reduce their taxes. Some tips to keep in mind in your first year:
- Hold onto your business receipts. The parking fee on the way to meet a client, the coffee you picked up for the office—all these small costs add up over time and can be written off as business expenses if you’ve held onto your receipts.
- Find home-based business deductions. If you run your business from home, you may be able to deduct a portion of home-related expenses, such as heat, electricity, and other home maintenance.
- Employ a family member. In both Canada and the US, small businesses are allowed to hire family members for income sheltering purposes. (Check with your country’s revenue service to see what options are available to you.) Still, we strongly advise you to consult a tax professional to help you navigate tax laws and policies for your business. In fact, when interviewing business owners for our Cost of Starting a Business research, “hiring an accountant” came up repeatedly as advice to new entrepreneurs.
Still, we strongly advise you to consult a tax professional to help you navigate tax laws and policies for your business. In fact, when interviewing business owners for our Cost of Starting a Business research, “hiring an accountant” came up repeatedly as advice to new entrepreneurs.
One business owner put it this way:
“I realized I had two options: I could keep doing my accounting and taxes myself to save money, which would cost me a few days of work, sleepless nights, and my kid’s soccer game. Or I could hire an accountant who can do it in 30 minutes and give me time back to focus on my business.”
Not on Shopify yet?
Here’s a quick reminder why launching your business on Shopify is the right move. With Shopify you can:
- Build a professional website and brand with no coding or design expertise required.
- Offer your customers flat or free shipping because we’ve negotiated the lowest possible carrier rates on your behalf.
- Promote your products and create marketing campaigns with Shopify Email, or through any of our channel partners, like Facebook and Google.
- Choose from thousands of free or affordable apps to help you grow and manage your business.
- Hire from a list of Shopify-vetted experts for the specialized tasks you can’t manage on your own.
Start your free trial of Shopify—no credit card required!
Illustration by Isabella Fassler
Startup financial tips FAQ
What is the most common way to fund a startup?
There's no shortage of ways to fund a startup. Here are some of the most common: Business loans Raising money from family and friends Raising money from investors “Bootstrapping” your business—that is, generating revenue as quickly as possible and using those funds to start a business Using personal funds to start the business
What are the best startup financial tips?
- Don’t skip financial planning.
- Grow your network.
- Familiarize yourself with financial health tools and apps.
- Invest in product research and validate your idea.
- Keep your marketing budget low and track obsessively.
- Understand your shipping strategy.
- Understand your tax obligations (or hire someone that does).
What are some financial mistakes startups should avoid?
- Not validating your business idea before investing heavily
- Not having a financial plan
- Not having a strategic budget for marketing
- Not growing your network
- Not using free resources and tools to manage your business finances
- Not having a shipping strategy
- Not having a plan for taxes