On average, US small business owners spend $40,000 in their first year of running a business. Does that number seem high? If so, you’re not alone.
在十月,我们调查了爱r 150 aspirational entrepreneurs in the US and asked them to answer a deceptively simple question: “How much does it cost to start a business?” We then surveyed 300 established ecommerce small business owners (with four employees or less) and compared their first-year cost breakdowns with the predictions made by aspirational entrepreneurs.
What we found is that aspirational entrepreneurs underestimated how much money they need to start a business. What’s more, high-earning businesses prioritized their investments very differently, spending less on marketing, and a lot more on their team compared to businesses that didn’t turn a profit in their first year.
Table of Contents
How much does it cost to start a business?
The aspirational entrepreneurs we surveyed guessed it would cost less than $40,000 to start their business—a lot less. According to our research, aspirational entrepreneurs expected to spend only $17,000 in their first year.
Why it matters
All budgets are based on future-looking forecasts and involve some level of uncertainty, but the more inaccurate your budgets are, the greater the risk to your business. In particular, under-budgeting can leave you with too little cash or credit available to pay your bills, creating unexpected cuts or even forcing your company to go out of business.
Indeed, 30% of US small businesses that fail cite a shortage of cash as the reason. Even in the pre-pandemic world, half of US small businesses had less than two weeks’ worth of cash on hand, making it impossible to cover their basic costs during a prolonged downturn.
Indeed, 30% of US small businesses that fail cite a shortage of cash as the reason.
This can be mitigated with effective financial planning. Financial plans are a key building block for any business, and they include more than just expenditures—they also detail projected sales and cash flow projections. If you’re an aspirational entrepreneur, talk to other business owners, reach out to your network, and consult a financial planner if you feel overwhelmed.
Breaking down first-year costs by expense category
We asked the business owners in our survey to look back at their first-year records and tell us how much money they allocated to various business expenses as a percentage of their total budget. To keep it simple, we bucketed the following business functions and cost categories for them:
- Product:raw materials, inventory, supplier, manufacturing, patents, etc.
- Operating:incorporation/legal fees, additional software, accounting, etc.
- Online store:website/platform subscription, hosting/domain, contract developer/designer, etc.
- Shipping:packaging, labels, etc.
- Offline:stall/table fees, rent, gas, etc.
- Team/Staff:salaries, benefits, perks, etc.
- Marketing:logo, branding, ads, printed materials, etc.
What our research shows
In their first year, small businesses spent:
- 11% on operating costs
- 10.3% on marketing costs
- 9% on online costs
- 31.6% on product costs
- 8.7% on shipping costs
- 18.8% on team costs
- 10.5% on offline costs
How much businesses spend in their first year depends on the size of their team
Perhaps unsurprisingly, having employees dramatically increases team spend.
What our research shows
- Business owners with zero employees spent $18,000.
- Business owners with one to four employees spent $60,000.
Unexpected costs in the first year
Beyond fixed costs, business owners also noted common one-time costs that sprung up in their first year and warned of hidden expenses to look out for.
What our research shows
The most-cited unexpected costs of running a business were:
- Shipping.34% of businesses cited packaging costs, damaged or returned items, and general shipping fees. This was particularly painful for businesses with low shipping volumes in the early stages.
- Legal.23% of businesses cited one-time startup costs like insurance, licenses, and permits as unexpectedly costly. They were also surprised that they were charged to incorporate both state-wide and federally in the US.
- Inventory and product.21% of businesses said that costs associated with their inventory, such as product testing and receiving and returning defective products, as well as surplus inventory, could quickly rack up bills.
- Taxes and accounting.In the qualitative component of our study, business owners repeatedly mentioned taxes and accounting as painfully cumbersome—and worth hiring professional help for.
Why it matters
The more you know! Recurring expenses and fixed costs are only part of your financial plan—hidden costs, one-time costs, and variable costs also need to be planned for in advance. What happens if an unexpected event, like COVID-19, throws off your projections? It’s always a good idea to do some contingency planning and set aside a cash reserve, just in case.
Aspirational entrepreneurs overestimated online costs
Aspirational entrepreneurs expected online costs to be more expensive than business owners reported.
What our research shows
- Aspirational entrepreneurs expected to spend 12% of their budget on online costs in their first year.
- Business owners expected to spend 9% of their budget on online costs in their first year.
Why it matters
Beyond ineffective budgeting, entrepreneurs who expect to spend more may end up paying more than they have to. The rationale is simple: if entrepreneurs are going into business expecting to spend more on a service, what they’re willing to pay for said service goes up accordingly.
It’s important that entrepreneurs do their research when choosing to hire designers or developers to avoid being overcharged—or opt for an ecommerce provider thatvets and curates experts for you.
The perceived cost and complexity of launching an online business continues to be a salient barrier to entry for many aspirational entrepreneurs. But it’s largely unfounded. For Shopify’s part, our core ethos—orraison d’être, if you will—is to enable precisely those entrepreneurs who don’t have coding or design skills to build an online store. And to do so affordably.
Start your free trial of Shopify—no credit card required!
Spending patterns among high-earning businesses
Just because business owners managed their budget a certain way in their first year doesn't mean it was the right way. Indeed, most of our respondents admitted that, in hindsight, they would have spent their money differently in their first year.
To provide better guidelines for aspirational entrepreneurs, we decided to look more closely at the data of businesses who reported higher revenue in their first year to see what—if any—budget decisions contributed to financial success. Here’s what we found.
High-earning businesses spend more on team costs
Businesses that reported higher revenue in their first year spent significantly more on team costs—almost one third of their total budget.
What our research shows
- Businesses with a yearly revenue of less than $10,000 spent 8% of their budget on team costs.
- Businesses with a yearly revenue of $10,000–$100,000 spent 23% of their budget on team costs.
- Businesses with a yearly revenue of $100,000+ spent 32% of their budget on team costs.
Why it matters
The relationship between revenue and team costs may seem like an obvious one—in other words, if you make more money you can afford to pay yourself and hire employees. But the relationship goes both ways: adding members to your team can drive revenue growth.
And while going at it alone is good business sense at the beginning, it’s worth noting that there’s a ceiling with this approach. When you’re a solopreneur, you have limited resources: they start and end with you. You’re limited to the skills you possess and the skills you’re willing to learn.
Many business owners reach a milestone in their career where they need to weigh the financial costs of hiring help with the time costs of doing everything by themselves.
It’s important that entrepreneurs know what red flags to look out for that indicate it’s time to hire help. Some red flags include turning down work because you can’t keep up, seeing the quality of your product or service suffering, or seeing the quality of your sleep or mental health suffering. Don’t put yourself in a position where you’re spread so thin that you can’t run your business in a sustainable way.
Businesses who made less in their first year spent more on marketing
When we asked business owners, “How much did marketing account for as a percentage of your overall budget?” we found a significant relationship between marketing spend and revenue.
The less money a business made overall, the more it spent on marketing. And the inverse was true too: the more money a business made overall, the less it spent on marketing.
What our research shows
- Businesses with a yearly revenue of less than $10,000 spent 13% of their budget on marketing.
- Businesses with a yearly revenue between $10,000–$100,000 spent 7% of their budget on marketing.
- Businesses with a yearly revenue of $100,000+ spent 7% of their budget on marketing.
Why it matters
If businesses are overspending on marketing without a clear return on investment, it could be an early sign of bigger problems, such as a website that doesn’t convert or worse yet, a weak product-market fit. It’s imperative then that business owners obsessively track, report, and revisit their marketing efforts on a regular basis.
Still, marketing is more of an art than a science, and getting the budget exactly right at the beginning is tough. Spend too little and you’re not getting your name out, spend too much and you’re not seeing a profitable return.
Our findings, as well as findings by experts from the US Small Business Administration, suggest that the sweet spot for a marketing budget for an early-stage B2C business is between 7% and 8% of revenue.
Our budget recommendations
It’s important to note that the costs of starting a business vary greatly and depend on many different factors, including the industry you’re operating in, your cost of goods, your projected sales, what business model you’re using, and so on.
Still, after analyzing trends among high-earning businesses and consulting startup advisers, there appears to be a general range that’s advisable to spend in each cost category in your first year:
- Operations:10%–15%
- Product:28%–36%
- Shipping:8%–12%
- Online:9%–10%
- Marketing:7%–12%
- Team:14%–30%
Starting your own business is not for the faint of heart. But with the right information and a clear picture of your finances, you can manage a lot of the risks associated with being an entrepreneur. And with the right ecommerce platform, managing all the other moving parts is a whole lot easier, too.
*All of Shopify’s 2020 Cost of Starting a Business is based on survey data collected in October 2020 from 300 small business owners and 150 aspirational entrepreneurs in the US. All values are rounded averages. All data is unaudited and subject to adjustment. All financial figures are in USD unless otherwise indicated.
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