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How to calculate business start up costs

Make sure you have enough money to successfully start your business with our guide to calculating start up costs.

A sure-fire way for any start-up to fail is to simply run out of money.

That’s why creating a solid business plan opens in new window and working out your business start-up costs is a vital first stage in launching a company opens in new window.

Having a realistic idea of your start-up costs is essential as it allows you to keep a tight rein on cash flow opens in new window and reduces the chance of running out of resources before your business has taken off.

And, if you’re looking to take out a business loan opens in new window, securing the right amount demonstrates sound financial planning and means you won’t have to go back cap in hand if resources get stretched.

Getting to grips with business start-up costs is confusing as people use three key terms interchangeably: start-up costs opens in new window, start-up assets and start-up financing.

Each has a different meaning but all are essential to creating a strong business plan opens in new window and raising the right amount of investment needed for your business to become profitable.

Our guide explains the jargon in simple terms and shows you how to calculate start-up costs for your business.


Making business finance work for you

Starting a business doesn’t come with a set of instructions.

We know that understanding the many different types of financial product in the marketplace can be difficult.

Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.

Download your free copy


What are start-up costs?

Start-up costs are all the non-recurring costs involved in setting up your business, apart from assets.

Sometimes known as sunk costs they’re the costs that, no matter how much of a success or failure your business is, you can’t get back – they’re ‘sunk’ into the business venture.

Start-up costs cover expenses incurred in getting your business to the point where it’s ready to start selling to customers.

Start-up costs examples

Typical start-up costs examples include:

What are start-up assets?

Depending on the nature of your business you may need to buy equipment, machinery, vehicles and stock – known as assets and inventory.

Assets are different from expenses in that they appear on your balance sheet opens in new window as an asset value and are accounted for differently.

Asset costs and accounting is a complex area but generally an asset is a purchase that still retains its value: if you resold it the business would earn some money back.

This value falls over time as the business uses the asset, which is known as depreciation.

Assets fall under HMRC’s capital allowance scheme which allows a business to offset the cost of the capital expenditure against profits, in turn reducing corporation tax liability opens in new window.

This currently applies to any capital expenditure up to £1,000,000 in any 12-month period – known as the Annual Investment Allowance (AIA).

For new businesses HMRC offers an additional allowance in the first year of trading, offsetting additional expenditure such as energy-saving equipment and some cars with low CO2 emissions opens in new window.

It’s worth knowing that you can’t claim the full amount on equipment that you also use for personal use.

For example, if you purchase a laptop for £500 and use it half the time for personal use you can only account for £250 as the business asset that is offset against profits.

Start-up asset examples

It’s a good idea to keep an asset register detailing the assets you’ve purchased along with receipts so you can claim these as capital allowances on your annual tax return.

Typical start-up assets include:

  • Equipment – Referred to as ‘plant and machinery’ on a HMRC annual tax return opens in new window, this is any equipment such as laptops, cameras, computers, printers, office furniture and cars. It’s worth knowing that cars do not fall into the Annual Investment Allowance, apart from some low-emission models.
  • Inventory – If you carry inventory or stock – even raw materials such as textiles or wood – then this should be listed as an asset as it has a resell value.
  • Cash and operating liquidity – Any funding that’s invested in your start-up (apart from loans or other debts) are generally considered assets and need to be accounted for.

What is start-up financing?

The third pillar of start-up costs that you need to calculate is start-up financing – how much money your business needs to operate until you break even opens in new window and start generating a profit.

Start-up financing must cover the initial start-up costs, the cost of purchasing assets, and any on-going fixed and variable costs incurred once the business is open such as salaries opens in new window, utilities opens in new window and on-going marketing activity.

It should include any interest payable on loans.

Need help understanding cash flow? Download the free cash flow template opens in new window


How to calculate start-up costs

Calculating start-up costs involves creating a financial forecast of the business, covering all costs before the business opens, up to the point that it makes a profit.

  • Start-up assets – Start by making a list of all the assets you need to purchase to operate your business: include machinery, computers, vehicles and inventory. For each item on the list research the costs of purchase by visiting retailer websites or contacting suppliers.
  • Start-up costs – Make a list of all the initial expenses you’ll incur setting up your business such as registration fees and web hosting. Check there are no recurring costs involved.
  • Fixed costs – List all of the fixed costs your business will incur in the first year. Fixed costs are the costs your business needs to pay no matter how many products it sells or customers you have. These costs are ‘fixed’ over a period of time, such as a month or a year.
  • Variable costs – List the costs that vary depending on the output or sales revenue of your business and are directly related to how many products your business sells such as materials, production and marketing costs.

You’ll also need to forecast how much revenue you’ll make on a monthly basis over the first year, including details such as customer volume, units sold, pricing, average revenue per customer (ARPU) and margin on sales.

How to create a business forecast

1. Create a spreadsheet that lists your start-up costs, such as assets and initial expenses, and total these up.

List these as your business’s sunk costs.

This is how much money you’ll need to spend to get your business to the point of being able to launch.

2. On the same spreadsheet create a 12-month year ahead view that shows your predicted business activity for each month of the first year of trading.

For each month list the fixed costs your business will incur such as spending on broadband, electricity and rent.

This shows you how much money each month you’ll need to spend to keep the lights on and staff paid.

3. Next you’ll need to model the variable costs, products sold or customers served, pricing opens in new window and revenue you’ll generate each month.

For example, you might estimate selling 10 widgets in the first month, 20 in the second month, and be selling 120 a month by month 12.

For each month work out the revenue generated by sales and subtract the variable costs connected with selling it such as materials costs or sales commission.

Subtract the fixed costs as well and you’ll end up with a profit for loss opens in new window for each month.

4. Work out the break-even point opens in new window for your business to calculate how many products you need to sell each month to achieve break even.

Plot these against each month to work out which month your business will sell enough widgets to achieve break even.

5. You can now see how many months your business will need to operate until it sells enough widgets to achieve enough monthly revenue to hit break even.

Until this point each month your business is making a loss opens in new window.

Add up the losses for each of the months until the break-even month and that will show the cumulative loss of your business – or, how much total money your business will need from month 1 until your business breaks even.

6. Finally, add the sunk costs to that total to show the total amount your business will need to start-up, launch and operate before making a profit.

This is how much investment your business will need to raise in order to become profitable opens in new window.


Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or its subsidiaries or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

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