Determine Start-Up Costs and Working Capital

How to Tally Up Your Start-Up Costs and Working Capital

From printer ink to rent, business ownership comes with a lot of costs. Luckily, determining how much it’ll cost to start and grow your business is easier than you think—all it takes is a little planning. Keep reading to find out how to identify your costs and get a close estimate, which will help you out in the long run.

Types of Business Costs

There are two types of costs you’ll want to estimate before you invest a lot of time and money into your business idea:

• Start-up costs are one-time costs you’ll incur when starting your business.
• Working capital is the money you need on hand to keep your business running and manage fluctuations in cash flow before you start making a profit.

Start-up Costs Examples

Start-up costs include things like:

• Rent deposits and any building renovations you need to make before you start operating
• Licences and permits required for your business or industry
• Employee recruitment and training
• Initial inventory or raw materials
• Initial marketing materials and advertising, such as creating a logo or branding

Tip: If you’re buying a business or franchise, your purchase price is your start-up cost, as the costs listed above are usually included in the asking price.

Keep in mind that different industries and business types will have higher start-up costs. For example:

Working Capital Costs Examples

Working capital costs include things like:

• Employee wages and benefits
• Rent
• Utilities, such as internet and electricity
• Ongoing marketing and advertising
• Operational software
• Shipping costs, such as packaging and labels
• Website or platform subscription and ongoing web updates
• Inventory and supplies for goods

How to Calculate Working Capital

Follow these simple steps to determine your working capital costs:

• Estimate your monthly costs to determine the minimum monthly amount you need to stay in business. Include things like wages, utilities, internet, advertising, rent and other ongoing costs. Our Start-up Costs Calculator can help you add these up.
• Transfer these totals to a cash flow template.
• Add your sales estimates for the first few months. It’s important to be realistic—remember, some businesses don’t have any sales initially. Each month you’ll see how much ‘working capital’ you are short. Try our revenue calculator to estimate your potential sales now.

Tip: Once you know how much you’ll need, explore the six ways to finance a business.

Benefits of Calculating Your Costs

Determining your start-up costs and working capital needs early on is important for a variety of reasons. For example, it can help you:

• Know when you will break even: If you know how much it’ll cost to start and run your business, you’ll be able to more accurately forecast when your business will break even—the point at which your total costs equal your total revenue.
• Know when you’ll turn a profit: Once you’ve determined when you’ll break even, you can use that information to determine when you’ll start making a profit.
• Secure loans and attract investors: When applying for loans or funding, potential lenders and investors will want to know your financials.
• Save money with tax deductions: If you know how much your profit could be, you’ll be better able to estimate your tax bill and find ways to save on it.

Cash Flow Planning

Knowing what your cash flow will look like for your first year can help ensure that you have the funds you need to operate your business—and avoid surprises when your tax bill comes. Plus, this can help relieve some of the financial stress you may feel as you start and grow your business. You can use our Business Cash Flow Tool or the Cash Flow Forecast template to estimate cash flow for your first several months in business.

Cash Flow vs. Profit

It’s also important to know the difference between the cash flowing into your business and your net profit, which ultimately is what you are taxed on.

• Cash flow is simply the cash that comes in and goes out of your business each day. Money in, money out.
• Profit is what the Canada Revenue Agency (CRA) will tax you on from your end-of-year accounts of your business operations.

Tip: Calculate your profit with this simple formula: Profit = Total Revenue - Expenses

Here’s an example of how they compare:

You start your business and have sales of $100,000 with running costs of $60,000 during the year, and you buy a $40,000 piece of machinery. As far as you are concerned, you’ve made zero profit ($100,000 sales – $60,000 expenses – $40,000 machinery).

But that’s cash flow, not profit. As the machinery will last more than a year, you must depreciate the asset over time, and you can’t deduct the whole lot at once. If the rate of depreciation is 10%, then the cost will be $4,000 for the year ($40,000 times 10%).

Your profit will now be $100,000 less $60,000 in expenses less the $4,000 depreciation, which equals $36,000. You will need to report to the CRA a $36,000 profit and pay tax on that amount.

Tips for Creating a Cash Surplus

No matter what industry you’re in, it’s nice to have extra cash in case sales are down or expenses are up. Before adding in your own capital or taking out a loan, consider these ideas for creating a surplus:

• Limit credit, offer a discount for early payment or accept debit and credit card payments through a provider like Moneris
• Sell or rent out vehicles or under-used equipment
• Rent instead of buying equipment for your business to reduce your one time cash outlay
• Increase your prices, as long as doing so won’t cause a drop in demand
• Have customers pre-pay or pay a deposit
• Adjust your inventory practices, like using suppliers who will provide inventory on consignment
• Make operational improvements, like sourcing less expensive materials
• Set up a regular savings plan, such as contributing a percentage of sales every month to a business savings account