How Much Does It Cost To Start a Business? (Research)

Many entrepreneursstart a businesswith little more than a dream and a shoestring budget. In fact,some business models需要很少的前期成本,Shopify, we’ve personally witnessed thesuccess of countless entrepreneurswith humble beginnings. But among the small businesses that get their business off the ground and don't last, more than a third cite a shortage of cash as the reason.

We wanted to understand:how much does it cost to run a business—really? And do aspiring entrepreneurs have any misconceptions about what those costs will look like in their first year of business? In October, we surveyed 150 aspiring entrepreneurs and 300 small business owners in the US to find out exactly that.

How much does it cost to run a business?

According to our research, small-business owners spend an average of $40,000 in their first full year of business.

We also asked our respondents to take it one step further—we had them 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 functions and cost categories:

• Product:raw materials, inventory, supplier,manufacturing, patents, etc.
• Operating:incorporation/legal fees, accounting software and services, etc.
• Online store:website/platform subscription, hosting anddomain name, contract developer/designer, etc.
• Shipping:packaging, labels, etc.
• Offline:stall/table fees, office space, 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% onoperatingcosts
• 10.3% onmarketingcosts
• 9% ononlinecosts
• 31.6% onproductcosts
• 8.7% onshippingcosts
• 18.8% onteamcosts
• 10.5% onofflinecosts

It’s important to note that the amount businesses spent in their first year varied significantly, depending on factors like industry and business model; whether the business was a full-time, part-time, or hobby venture; and whether the business had additional employees. But more on that later.

Sources of financing for early-stage founders

While new entrepreneurs often rely on their personal savings to keep their business afloat in the early days, one-third of respondents reported reinvesting revenue from their business sales to cover their business costs in the first year.

What our research shows

Top funding sources for business owners:*

• Personal savings (66%)
• Reinvesting sales revenue (30%)
• Financial support from friends and family (23%)
• Personal loan (21%)

* Respondents could select more than one funding source

Why it matters

Accepting that your first year of business may not be very profitable is important for both财务规划and mental preparation. Many founders are the last to be paid in their first year, as all of the company’s revenue goes back into the business. That’s perfectly normal.

For companies struggling to make sales in their first year, creating a comprehensive financial plan with how much you’re going to need and how you’re going to use it will make it easier when you’re applying for a small business loan or trying to attract investors.

Don’t think of this as taking on debt: startup expenses are necessary to generate revenue, so thereturn on your investmentwill likely be greater than the upfront costs.

How much businesses spend in their first year

Perhaps unsurprisingly, having employees dramatically increases overall spend. If you choose to go the solo business ownership route, you canspend less than one-thirdwhat businesses with employees spend.

What our research shows

• Business owners with zero employees spent $18,000 in their first year.
• Business owners with one to four employees spent $60,000 in their first year (including salaries).

Unexpected costs in the first year

除了固定成本,企业主也指出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:

1. Shipping:34%的企业认为包装成本,损坏or returned items, and general shipping fees. This was particularly painful for businesses with low shipping volumes in the early stages.
2. Legal:23% of businesses cited one-time business startup costs like licenses, permits, and business insurance as unexpectedly costly. They were also surprised that they were charged to incorporate both state-wide and federally in the US.
3. Inventory and product:21% of businesses said that costs associated with their inventory, such asproduct testingand receiving and returning defective products, as well as surplus inventory, could quickly rack up bills.
4. 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

Recurring expenses and fixed costs are only part of your financial plan: hidden costs, one-time costs, and variable costs also need to be considered in advance. What happens if an unexpected event (e.g., a pandemic, a recession, or both) throws off your projections? It’s always a good idea to do some contingency planning and set aside a cash reserve, just in case.

Aspiring entrepreneurs overestimated online costs

When we asked our aspiring entrepreneurs how much they thought their first year of business would cost them, they wholly overestimated in one area: they expected online costs to be more expensive than established business owners reported.

What our research shows

• Aspiring entrepreneurs expected to spend 12% of their budget on online costs in their first year.
• Business owners reported spending only 9% of their budget on online costs in their first year.

Why it matters

Entrepreneurs who expect to spend more to start a business may end up paying more than they have to. The rationale is simple: if entrepreneurs expect to spend more on a service, what they’re willing to pay for said service goes up accordingly.

The perceived cost and complexity oflaunching and scaling an online businessremains a barrier to entry for many aspiring entrepreneurs. But it’s largely unfounded. For Shopify’s part, our core ethos is to enable precisely those entrepreneurs who don’t have coding or design skills tocreate an online store. And to do so affordably.

Our research corroborates this: of the 300 business owners we surveyed, we found thatShopify customers spent an average of $38,000in their first year, compared tonon-Shopify customers who spent an average of $41,000in their first year.

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Spending patterns among high-earning businesses

Just because a business owner managed their budget a certain way in the 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 aspiring entrepreneurs, we decided to look more closely at the data of businesses who reported higher earnings in their first year to see which decisions may have contributed to their 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 annual revenue of less than $10,000 spent 8% of their budget on team costs.
• Businesses with annual revenue of $10,000 to $100,000 spent 23% of their budget on team costs.
• Businesses with annual revenue of more than $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: 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 also drive revenue growth.

And while going 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 of $10,000 to $100,000 spent 7% of their budget on marketing.
• Businesses with a yearly revenue of more than $100,000 spent 7% of their budget on marketing.

Why it matters

If you’re 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 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 won’t get your brand in front of buyers; spend too much, and you’re less likely to hit your break-even point.

Our findings, as well as findings by experts from theUS Small Business Administration, suggest that the sweet spot for a marketing budget for an early stage B2C business is between 7% and 12% of revenue.

Our budget recommendations

Again, the costs of starting a business vary greatly and depend on many different factors, like the industry you’re operating in, your business model, the size of your team, your cost of goods, and so on. Ultimately, there is no right or wrong amount of money to spend in your first year, it’s abouthowyou spend what you have.

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%

Remember: starting a successful business is a marathon, not a sprint. It’s critical then that you don’t measure the success of your new business by your first-year profitability. Give yourself a runway of 18 to 24 months to get off the ground. Spend the first yearopening your online storetesting, reiterating, and reinvesting your sales back into your business using the above budget guidelines.

Being an entrepreneur requires a certain appetite for risk. But with the right information and a clear sense of your financial goals, you can avoid many of the financial missteps common to new entrepreneurs. And withthe right ecommerce platform, managing all the other moving parts is a whole lot easier, too.

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*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 aspiring 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.

Illustration by Isabella Fassler
Data visualization by Datalands