The money needed by an entrepreneur to set up a business when first starting a new business organization is called the start-up capital.
Setting up your own business requires initial cash injections from the owners.
This start-up capital will be used to pay for necessary paperwork, rent premises, purchasing essential equipment, buying raw materials, hiring first workers, paying for basic marketing activities, etc.
Typical start-up costs for a new business
Below is a short list of some of the necessary start-up costs that each business will most likely have to face in the initial stage of operation.
- Legal fees. Costs of business registration, notary public, layers, licenses, permits, patent registrations, accounting fees, insurance costs, etc.
- Premises. Purchase costs of land, factory and office buildings; or down payment for mortgage in case the business decides to take a bank loan; or paying rent to the landlord in case the business decides to lease premises.
- Building alterations. Physical changes to the buildings such as fixtures and fittings. Connection and installation of utilities such as water, gas, electricity, telephone and broadband Internet, etc.
- Capital equipment. Purchasing office furniture such as desks and chairs, telephones, computers, machinery, tools, transportation vehicles, cash registers, office equipment such as paper, notepads, etc. Buying stock of initial raw materials.
- Marketing costs. Paying for market research costs, organizing advertising and promotional campaigns to inform the society about the new business, costs of Research and Development (R&D) of the first products, reaching out to first customers, etc.
- Human Resources (HR). Recruitment costs of workers and managers, organizing induction training, other training costs, etc. Or, hiring a specialist recruitment agency to help with recruitment.
- Financial costs. In case a business plans to hire workers and managers, it will also need money to pay wages and salaries. TAXes and social security payments must be withheld from the paychecks and paid to the government either monthly or on quarterly basis.
Why is having start-up capital necessary?
Starting a new business is risky. Owners step into unknown even though both financial risks are calculated and non-financial risks are accounted for in the business plan.
Financial Risks. The financial risks include having not enough start-up capital, or problems with raising enough money to start, run and grow the business. The level of demand for the firm’s products at the beginning might not be sufficient for it to recoup its start-up costs in the first few months of operations, let alone to earn any profit.
Non-financial Risks. The non-financial risks mainly include mismanagement – organizing and controlling the business badly. Also, underestimating the challenges faced when setting up a business or being self-employed, the strength of competitors or difficulties with finding and retaining customers.
Careful planning of various aspects of the business, and raising enough start-up capital, can considerably reduce financial risks of setting up a new business.
