Avoid These Small Business Startup Costs Mistakes

You can’t simply cross your fingers and hope for the best when it comes to estimating startup costs for your business. Poorly planning how much you need to open and operate a business in the first year can lead to financial struggle, unexpected debt—or even worse—business failure. According to the US Bureau of Labor Statistics, more than 20% of small businesses fail in that first year, often because of insufficient funding. Many small businesses run out of money quickly, especially if they haven’t secured enough capital to cover initial expenses and operations.

Here are some commonly made mistakes you should avoid when planning your startup costs:

Underestimating Costs

Many entrepreneurs simply underestimate what it will cost to start a business. When projecting costs, you need to plan for the worst, especially in an uncertain economy. Be sure to account for everything, so don’t overlook hidden costs like lease deposits, connecting utilities, permits, insurance, legal fees and personal living expenses. Expect everything to cost more than you think, so be conservative by estimating expenses high. Plan for at least three to six months’ worth of operating costs as part of your startup needs.

Tip: Research industry benchmarks and overestimate rather than underestimate.

Overspending on Non-Essentials

Investing too much on office space, branding, cool furniture and décor, or equipment before proving the business model works is a surefire way to overspend. It’s easy to waste precious startup capital on the things we want, but aren’t necessary to run the business. Bootstrap it in those early days by relying on your existing personal resources, repurposing used items or simply waiting until you have cash flow to buy. Limit your expenditures on purchases that don’t contribute to making money.

Tip: Start lean—prioritize only what’s essential for launching the business.

Underestimating Time to Profitability

Many new business owners are overly optimistic about how quickly they will start making money and generate consistent revenue. They often fail to account for how long they may need to sustain the business before breaking even—let alone making a profit. Building sufficient clientele or sales doesn’t happen instantly, and some businesses take longer than expected to build a steady customer base and achieve profitability. Without sufficient financial reserves, owners may struggle to cover essential costs, putting the business at risk before it has a chance to succeed.

Tip: Consider alternative funding sources, such as a business line of credit to bridge any gaps.

Neglecting to Plan for Marketing

“If you build it, they will come” works only in the movies and is far from a healthy strategy to bring customers to your door. Likewise, relying solely on word-of-mouth without a marketing plan in place can leave your business struggling to attract customers and generate steady revenue. Whether you’re using digital marketing, advertising, promotional materials, signage, or pop-up events to reach your target customers, marketing your business requires an investment.

Tip: Allocate a reasonable budget for marketing, especially in the first year.

Not Planning for Contingencies

Unexpected expenses can arise, from contractor overruns to delayed product deliveries, so you need to be prepared. Without a contingency fund, these surprises can quickly become major setbacks. Unforeseen repairs, fluctuating material costs, or regulatory changes can further add to the financial burden. Planning ahead with a financial cushion ensures businesses can handle these challenges without jeopardizing operations.

Tip: Set aside a reasonable contingency fund as a buffer for unexpected expenses.

Not Understanding the Cost of Financing

When calculating startup costs, it’s essential to factor in the true cost of financing, including interest rates, repayment terms, and loan fees. Many entrepreneurs overlook these expenses, which can significantly impact cash flow and long-term profitability. To avoid surprises, use an online loan calculator to estimate monthly payments and ensure your budget accounts for all borrowing costs.

Tip: Compare different financing options and fully understand repayment obligations.

Careful financial planning for your startup will help you avoid common pitfalls and better ensure you’ll make it past that first year. Don’t go it alone—seek out the resources available to you, whether that’s a Michigan SBDC consultant, an accountant, or business startup webinars. Taking the time to educate yourself and plan strategically can make all the difference in building a strong foundation for long-term success. With the right guidance and a solid financial strategy, you’ll be better prepared to navigate challenges and grow your business with confidence.

Laurie Lonsdorf
Capital Regional Director
Lansing Community College

 

 

 

 

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