Many entrepreneurs dream of starting their own business, often with minimal resources. While some ventures can begin with relatively low upfront costs, many small companies falter within their first year due to a cash shortage. In fact, over one-third of businesses that don’t survive cite cash flow issues as the primary reason for their failure.
In an effort to understand the real costs of starting a business and to address misconceptions about these expenses, a recent Shopify survey of 150 aspiring entrepreneurs and 300 small business owners in the U.S. reveals vital insights. The findings highlight what new business owners should expect in their first year, offering a breakdown of essential expenses and practical budgeting advice.
Key Startup Costs Breakdown
On average, small business owners spend approximately $40,000 in their first full year of operation. However, the specific amount varies widely depending on industry, business model, team size, and product costs. The survey also asked respondents to reflect on their first-year expenses, which were categorized into seven main cost areas:
- Product Costs:
Product-related expenses, such as raw materials, inventory, and suppliers, accounted for 31.6% of first-year costs—making them the largest expense for small businesses. Managing inventory, including surplus or defective items, quickly adds up, with 21% of respondents noting that product costs were tough to control. - Operating Costs
Legal fees, accounting services, and business incorporation fall under operating costs and account for 11% of first-year budgets. Many entrepreneurs were caught off guard by unexpected one-time expenses, such as business insurance and state/federal incorporation fees. - Online Store Costs
While aspiring entrepreneurs expected to spend around 12% of their budget on online store setup, the reality was lower, with only 9% allocated to these expenses. Shopify customers, for instance, spent an average of $38,000 in their first year, slightly less than non-Shopify businesses. - Shipping Costs
E-commerce businesses should also plan for shipping expenses, which comprise 8.7% of total costs. Packaging, insurance, and shipping fees—especially for businesses with low volumes—were noted as challenging expenses. - Offline Costs
For those combining online operations with offline sales, the average business spent 10.5% on rent, office space, or market stalls. Offline expenses were significantly higher for those operating permanent brick-and-mortar locations compared to pop-up models. - Staffing Costs
Businesses with employees spent 18.8% of their first-year budget on salaries, benefits, and perks, but companies with higher revenue allocated even more to staffing. Solopreneurs could operate on much lower budgets, spending less than one-third of what businesses with employees spent. - Marketing Costs
Marketing, though essential, can be unpredictable. The survey found that businesses with higher revenue spent less on marketing while lower-earning businesses spent more. Early-stage B2C businesses typically allocate 7% to 12% of income for marketing, covering branding, ads, and promotional materials.
Starting a business is a long-term commitment, and first-year profitability is not always a realistic goal. Founders often reinvest most of their revenue into the business to fuel growth, leaving little for personal compensation in the early stages. Entrepreneurs should give themselves 18 to 24 months to get their business off the ground.
Understanding which costs are essential versus optional and differentiating between one-time and recurring expenses is crucial for effective financial planning. Categories such as operations, product, shipping, and staffing each have their own recommended percentage of the budget, and creating a clear financial plan helps manage startup costs effectively.
Financing Options for Startups
Regarding funding, many new businesses rely on personal savings or reinvest revenue from initial sales. However, other financing options can supplement initial investments:
- Personal Savings: The most popular funding method, with two-thirds of entrepreneurs relying on it.
- Financial Support from Friends and Family: Chosen by 23% of entrepreneurs.
- Personal Loans: Used by 21%, though personal liability is a risk if the loan cannot be repaid.
- Merchant Cash Advances: Business loans that are repaid based on a percentage of sales.
- Crowdfunding: Time-consuming but effective for sourcing funds from a wide pool of supporters.
- Venture Capital: Ideal for fast-growing businesses, though it involves equity giveaways and more paperwork.
- Business Credit Cards: Useful for covering smaller startup costs, though debt can accumulate quickly if not managed carefully.
In conclusion, starting a small business requires careful financial planning and a solid understanding of potential costs. Entrepreneurs anticipating these expenses and managing their cash flow effectively will be better positioned to weather their first year and build a sustainable business.
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