Starting a new business is highly risky because the owners step into unknown, even if the start-up costs and financial risks are calculated and accounted for in the business plan.
Most new business ideas fail, mainly due to mismanagement (organizing and controlling the business badly). For example, the owners might have underestimated the challenges faced when setting up a business or being self-employed, the strength of competitors or lack of sufficient demand from customers.
Typical costs for new businesses
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 and professional fees. Costs of solicitors, licenses, permits, patent registrations, accounting fees, insurance costs, etc.
- Premises. Purchase costs of land, factory buildings and office building, down payment for mortgage or paying rent to the landlord.
- Building alterations. Physical changes to the buildings such as fixtures and fittings. Connection and installation of utilities (e.g. water, gas, electricity, telephone and broadband Internet, etc.).
- Capital equipment. Office furniture, telephones, desktop computers, machinery, tools, motor vehicles, cash registers, office equipment such as notepads, and initial stock of supplies and raw materials.
- Marketing costs. Market research costs, advertising and promotional campaigns to inform customers about the new business, costs of Research and Development (R&D) of the first product(s).
- Human Resources (HR). Recruitment of workers, induction training, training costs, etc.
The level of demand for the firm’s products 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.
Nevertheless, the pursuit of profit remains a key incentive for entrepreneurs to take such risks. As mentioned earlier, careful consideration of various factors in the business plan can also reduce the risks of setting up a new business.
