Reading time: 7 minutes

This article is intended to be read alongside LegalVision’s Startup Cost Template, which you can download here for free.

Starting a business requires a large investment of blood, sweat and tears. It also costs money to start a business. But how much money, exactly?

From our work with over a hundred thousand Australian businesses, we’ve learned that first-time entrepreneurs sometimes struggle to identify the essential costs required to get their business up and running. Without a firm grasp of the types of expenses you’ll incur, there’s no way to forecast how much money you’ll need to get started. 

This article will help you understand the costs of starting and operating a business in its first year. 

Every Business is Different

Many of the costs to start a business are common across all industries and business models. But some are unique to your context. This article focuses on the most common startup costs. However, it’s important to identify if your business will incur additional costs due to your specific circumstances. 

Will You Sell Physical Products?

Businesses that sell physical products face a unique set of challenges and costs. You’ll likely have higher capital costs, like for leasing equipment and premises.

You’ll also need to think about your inventory (the stock you intend to sell). You should have stock on hand to fulfil orders. That means you’ll need to pay to store the product and deliver it to customers. You may also have to borrow money to buy the stock before you’ve received payment from customers (this is called working capital), and this will attract interest expenses.

Will You Need Staff From Day One?

Most startups keep their teams lean in the first year. Often the founders are the only workers and they try to avoid paying themselves. Other businesses need staff from Day One.

You can engage workers in two ways – as employees or as contractors – you can read about the differences here. Some startups prefer to engage contractors rather than hire permanent employees in the early days. This allows them to complete essential startup projects with a more flexible workforce.

Cash-strapped startups that need employees should consider incentivising staff with an Employee Share Scheme. Under this arrangement, you give employees the right to gain part ownership of your business. This can help bridge the gap between a startup salary and a corporate salary.

Will you have premises?

The cliché of starting a business in Mum’s garage is romantic but unrealistic for most founders. More often, founders get started from a home office or living room. Working from home has its perks, but you need to be aware of the risks. Also, if you work from home, speak to your accountant about claiming a portion of your household bills as business expenses. 

Eventually, you will need a dedicated office, retail space or factory and storage facilities. The costs to fit out and rent these premises are significant and leases often have three to five-year terms. Startups should consider short-term, lower-cost alternatives like pop-up venues or co-working spaces.

Common Startup Costs

Even the leanest startups incur some expenses when establishing the basic infrastructure for their business. Startups face a huge amount of uncertainty, but it’s worthwhile spending the extra time to build strong legal, administrative and technological foundations. We’ve seen hundreds of businesses incur unnecessary costs when they have needed to change their business structure or technology (‘tech’) stack after 6-12 months. Better to get it right the first time.

Legal and Administrative

Legal and administrative costs range from the essential (like certain insurances) to the seemingly negligible (printing and stationary). It’s important to focus on the more important aspects (like protecting your intellectual property with a trade mark or patent) while still taking the time to provide a rough estimate for easily-ignorable costs (like travel expenses). 

From our experience, the most important decisions for a startup are those that are difficult or costly to change. With that in mind, here are some areas to focus on:

  • Name, logo and branding: customers will develop a relationship with your brand from the day you launch. Changing any of these will likely result in legal, design and government fees.
  • Business structure: most businesses operate as companies. Sometimes a dual company or trust structure is used to protect intellectual and other property. Changing your business structure will incur legal fees and may have tax implications if you need to transfer assets between entities. 
  • Insurances: Meeting regulatory requirements is an obvious focus for startups. Many industries require specific insurances in order to operate a business. Some insurances are common across industries. It can be prudent to engage an insurance broker.

Technology

Your tech stack is similar to your business structure – it can be disruptive if you need to change it. Also, the quality of your website and sales tools can have a big impact on your revenue.

Here are our top tips when it comes to buying or building basic technology:

  • Invest in your website: for many businesses, this is your first touchpoint with your customers. It’s also a resource for potential customers to learn about your business and your product. For some, it can be worthwhile to hire a developer to build a bespoke website – just remember to save some money as a contingency, in case the build takes longer than expected.
  • Be cautious of online tools: there are probably thousands of cloud-based software tools that could increase your productivity and cost between $10 and $100 a month. The costs quickly add up. Also, the benefits of these tools often increase the more you use them – so it’s better to choose a handful and learn how to use them properly.
  • Get fast internet: founders don’t have time to wait for a web page to load!

Sales and Marketing

Most startups will go to market in their first year, so you’ll need some basic marketing assets from the get-go. While you’re getting started, it’s important to focus on marketing strategies that can be deployed at low cost. Capturing email addresses on your website and marketing to your email list is a common and effective approach. Building a presence on social media platforms and relevant online (and offline) groups costs lots of time but little money.

Paid advertising is another valuable strategy, but one you should approach with caution. Digital ad costs can quickly snowball as you chase a ‘critical mass’ of customers. Make sure you manage your advertising budget with discipline. 

Finally, be aware of the hidden costs of selling. Founders typically spend a lot of their own time in sales meetings. This time won’t appear in your financial statements, but it’s a huge investment. Keeping accurate customer information in a spreadsheet or Customer Relationship Management tool can save you many hours. 

Funding Your Startup

Once you’ve calculated your startup costs, you’ll need to consider how to pay for them. At least some portion of your costs will need to be paid before you earn any revenue – so you’ll need to finance them in another way. Your options include borrowing money from a bank or alternative lender, raising equity capital, accessing government grants or using your personal savings. Learn more here.

Key Takeaways

Starting a business requires foresight and careful planning. It’s critical to forecast your startup costs and make informed decisions on key issues, so you can avoid the cost of switching in the future. Investing in quality expert advice (from accountants, lawyers, designers, developers, etc.) can help you avoid costs and hassle in the future.

If you need assistance with any legal requirements associated with your startup, LegalVision’s experienced startup lawyers can assist. Just call 1300 544 755 or complete the form on this page.

Webinars

Redundancies and Restructuring: Understanding Your Employer Obligations

Thursday 7 July | 11:00 - 11:45am

Online
If you plan on making a role redundant, it is crucial that you understand your employer obligations. Our free webinar will explain.
Register Now

How to Sponsor Foreign Workers For Your Tech Business

Wednesday 13 July | 11:00 - 11:45am

Online
Need web3 talent for your tech business? Consider sponsoring workers from overseas. Join our free webinar to learn more.
Register Now

Advertising 101: Social Media, Influencers and the Law

Thursday 21 July | 11:00 - 11:45am

Online
Learn how to promote your business on social media without breaking the law. Register for our free webinar today.
Register Now

Structuring for Certainty in Uncertain Times

Tuesday 26 July | 12:00 - 12:45pm

Online
Learn how to structure to weather storm and ensure you can take advantage of the “green shoots” opportunities arising on the other side of a recession.
Register Now

Playing for the Prize: How to Run Trade Promotions

Thursday 28 July | 11:00 - 11:45am

Online
Running a promotion with a prize? Your business has specific trade promotion obligations. Join our free webinar to learn more.
Register Now

Web3 Essentials: Understanding SAFT Agreements

Tuesday 2 August | 11:00 - 11:45am

Online
Learn how SAFT Agreements can help your Web3 business when raising capital. Register today for our free webinar.
Register Now

Understanding Your Annual Franchise Update Obligations

Wednesday 3 August | 11:00 - 11:45am

Online
Franchisors must meet annual reporting obligations each October. Understand your legal requirements by registering for our free webinar today.
Register Now

Legal Essentials for Product Manufacturers

Thursday 11 August | 11:00 - 11:45am

Online
As a product manufacturer, do you know your legal obligations if there is a product recall? Join our free webinar to learn more.
Register Now

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 AFR Fast 100 List - Australian Financial Review
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards