Underestimating start-up costs is one of the most common and most avoidable reasons a new business runs into trouble, whether because a funding application is based on an unrealistic figure or because the owner simply didn’t account for everything needed to actually open and operate. A thorough, honest calculation protects both the funding application and the business itself.
Include all of these categories, not just the obvious ones.
One-off setup costs
Registration, licensing, equipment, initial stock, premises deposits and fit-out costs are all genuine one-off expenses that need to be paid before the business opens its doors, and they’re often the costs a first-time founder estimates most optimistically.
Get actual quotes for major equipment and fit-out costs rather than estimating from memory or a general online figure, since real supplier pricing is often higher than a rough guess.
Working capital to cover the gap before revenue arrives
Almost every business takes time to reach a stable, predictable revenue level, and working capital needs to cover operating costs, rent, salaries, utilities, during this period, not just the visible setup costs.
Underestimating this specific category is one of the most common reasons a properly funded business still runs into a cash crisis in its first months, since the setup costs were covered but the ongoing costs before revenue stabilised were not.
Contingency for the unexpected
Add a genuine contingency, typically a meaningful percentage of the total estimated cost, for the unexpected expenses that arise in almost every new business, a delayed opening, an equipment issue, a permit taking longer than planned.
A funding application or personal budget with no contingency built in signals either inexperience or unrealistic optimism to a lender or investor reviewing it, neither of which helps the application.
Present the calculation clearly in a funding application
A detailed, itemised cost breakdown is far more credible to a funder than a single round number, since it demonstrates the founder has actually thought through what the money is for, which is exactly what a lender wants to see.
Free help preparing a properly costed business plan is available through the Small Enterprise Development and Finance Agency. Our guide to why a business needs funding covers matching the right funding type to each of these different cost categories, since working capital and one-off setup costs are often best funded differently.
Frequently asked questions
Why is underestimating start-up costs so common?
First-time founders tend to estimate one-off setup costs optimistically and often overlook the working capital needed before revenue stabilises.
What is often missed in a start-up cost calculation?
Working capital to cover operating costs during the period before the business reaches stable, predictable revenue.
Should a start-up budget include a contingency?
Yes, a genuine percentage of the total estimated cost, since unexpected expenses arise in almost every new business.
Does a missing contingency affect a funding application?
Yes. It can signal inexperience or unrealistic optimism to a lender or investor reviewing the application.
How should start-up costs be presented in a funding application?
As a detailed, itemised breakdown rather than a single round number, which is far more credible to a funder.
