You knew diving into business ownership would be costly, but did you know how much? When you’re new to the game, it’s tough to predict all your first-year expenses and how fast the money will go.

May we suggest our new financial reporting tool? Advanced financial reporting is an inexpensive way to keep tabs on what your business is doing, while giving you a deeper understanding of what it all means. Pairing this with a QuickBooks Online subscription that allows receipt uploading to keep track of all these expenses could really benefit you in the event of a potential audit.

Of course, we have some other first-year business owner insight to offer too. Soak it in and call us with your questions: 218-623-6050.

The TCG Accounting Team’s
“Real World” Business Strategy Note

Anticipating First-Year Expenses in Your Business
“Expectations is the place you must always go to before you get to where you’re going.” – Norton Juster

The money to start a business and keep it running for a year isn’t always clear, but often underestimated. A recent poll of 700 small-business owners found that more than half of them lowballed what they’d have to spend during their first year. 

That’s a lot of miscalculation — and a lot of potential for having to shut the doors before you ever get off the ground. No wonder a third of small companies go out of business within two years.

All that to say: It pays to know what you’re getting into and how to survive those crucial first 12 months. 

Where does all the money go?

Business owners drop from 35 to 100 grand in the first year, depending on whether their company is completely online or completely brick-and-mortar, or something in between. 

About a third of that goes to inventory, a fifth on equipment, 10% to 15% each on location and taxes, and a little under 10% each for utilities and payroll. Other common costs include insurance and marketing. New owners have said that surprise-heavy expenses have included taxes, technology, various fees and shipping costs (check out that link for our recent post about how to avoid those). 

Where’s the money come from for all that? Most sources are familiar: investors, such as venture capitalists and angel investors. Then there’s crowdfunding and borrowing money from family or friends. The U.S. Chamber of Commerce claims that most startup “seed rounds” are around half a million to $2 million. 

One troubling surprise for brand-new businesses is lack of conventional funding. Commercial business loans can be hard to come by for completely new companies that have no proof of future revenue. Many owners turn to their own money in the form of their everyday savings, nest eggs, credit cards, or personal loans. There’s also alternative lenders such as peer-to-peer lending with its risks.

Common mistakes

What goofs do most companies make that you should avoid? Glad you asked.

  • Inaccurate billing. Often startups do little better than throw a dart at a board to determine a price for their services. Hopefully that board balances attractive fairness and eventual profit. A year’s experience can be a pricey teacher if you underestimate initially and fail to adjust what you charge. 
  • Blending personal and business expenses. Business bank accounts and bank cards should be opened before the first service is rendered and kept strictly for business — documenting tax deductions being just one of the many reasons. 
  • Skimping on professionals. Get the best lawyers and tax pros you can afford. They’ll pay for themselves in a surprisingly short time. At the same time, expensive doesn’t always equal best. You know your budget. Fun fact: 97% of business clients we’ve served are still in business
  • Failing to keep an emergency fund. As solid as this advice is for household expenses, it’s even more important in business. 
  • Discarding receipts. This includes cash register tapes, invoices, canceled checks, proof of purchase of furniture or machinery and more. Your business accounting, particularly in a first year when your company might operate at a loss, depends on deductions and documentation. Invest in a good document-tracking system, at the very least a good filing cabinet
  • Not following the money. Expenses should be evaluated constantly to make sure income is keeping pace with outlay. Not keeping up with invoicing or billing (not to mention knowing when and how to charge sales tax) can quickly turn into late fees, interest, penalties — essentially wasted money. 
  • Putting sales ahead of profit. If you’ve ever watched one episode of Shark Tank, you know how much you bring in is not necessarily how much you make after expenses. That’s easy to forget in the thrill of a new business. 

Thinking ahead

Small-business owners are reported to have brought in between 50 grand to the very low six figures in their first year — respectable, but not all profit. In fact, only 15% of the business owners polled started to turn a profit in under a year. The percentage jumps to 2 out of 5 in the second year. 

Plan to survive your first year of business ASAP by figuring out your startup costs beforehand. The U.S. Small Business Administration has a calculator for this. We can help, too. Also to do sooner than later: 

Visualize your ideal client. This concept will evolve, of course, but you don’t necessarily want to take every client who happens to walk through your door. Don’t try to be everything to everyone. That goes for every marketing or networking event, too. Don’t be invisible, but don’t spread yourself too thin. 

Trim costs early on. The bag lunch? Public transit instead of driving? Do you really need all that office space right from the get-go? 

Keep your business plan nimble. Things will change more than you can imagine. Be patient and keep your eye on your goal but adapt along the way.

The process of starting a business is too important to wing it on your own. You want other professionals around you, helping you get off the ground and then, to keep flying. Count us in.

Getting you started right,

The TCG Accounting Team