— March 19, 2018
As an aspiring entrepreneur, it’s natural to overestimate the ease of entry for an online business. After all, since you won’t have to pay for a physical retail space, or in many cases, an office, your overhead will be drastically lower than your competitors.
You know you’ll need to budget for the cost of production. This could be for buying existing products at wholesale or creating those products yourself. Yet, the biggest allure of starting an online business is the low amount of capital necessary to get started to cover online startup business expenses.
Remember These Online Startup Business Expenses
That said, thousands of entrepreneurs every year underestimate what it really takes to get an online business started. If left neglected or unaccounted for, all those hidden expenses can kill your business before it has a chance to succeed. Here are some of the hidden online startup business expenses to account for:
1. Permits and licensing.
You might think that permits and licenses only apply to brick-and-mortar retail operations. However, many online businesses require permits. For example, you might be required to register for sales tax. Or, you may need a specific profession or occupation license to complete your work.
You might also need a general business license or a weights and measures license. The permits you need will vary by state and district. If you find you need one, it could be a surprise startup cost of hundreds to thousands of dollars.
2. Equipment and maintenance.
Depending on what you plan to use, equipment can be one of the massive online startup business expenses. If you’re buying full-scale production equipment, you’ve likely already built this into your business model. Don’t forget—you’ll also need laptops, routers, and other equipment to keep your business running. More than that, you’ll need to periodically pay to have this equipment maintained or repaired.
3. Domain hosting and email.
No matter how you choose to design and build your website, you’re going to need someone to host it. Depending on your site’s needs and your plan to scale, you might need an advanced hosting plan. Inexpensive plans are manageable for small business owners and new entrepreneurs. However, upscale packages can be egregious.
4. Software and platforms.
If you aren’t sure how to build an online store, you’ll probably rely on an out-of-the-box eCommerce platform to support your enterprise. Remember, there are fees and sometimes subscription costs attached to these solutions. You should also consider other types of software you’ll need to run your business. This includes accounting software to keep track of your finances and team communication software to manage your projects.
5. Utilities and access.
You’ll need to pay for internet and electricity, at a minimum, to keep your business running. Even if you work from home, these are costs you can’t ignore; plus, you’ll need to have a backup plan in case your main line of access goes down (even if it’s just running down the street to the coffee shop).
6. Transactional costs.
If you use an online payment gateway or plan on taking credit card payments, you’ll probably be responsible for a small transactional fee for each transaction. This may not seem like much, but it can seriously eat into your profit margins if you haven’t accounted for it.
If you aren’t operating in a physical space, it’s easy to neglect the importance of insurance—but you’ll still need various types of insurance to keep your business protected, including general liability insurance, product liability insurance, and possibly business interruption insurance. These can add hundreds to thousands of dollars in expenses to your existing model.
8. Inventory shrinkage.
If you’re selling products on an online store, you’ll probably have to worry about inventory shrinkage—in other words, the loss of product before it’s shipped to individual sellers. Shrinkage can happen due to theft, damage, miscounting, and even fraud, and no matter how well you protect against it, it’s still a possibility you’ll have to account for.
9. Professional fees.
There are some things you just can’t (or shouldn’t) do unless you’re an expert, such as drafting a contract or handling complex tax returns. Accordingly, you’ll need to pay some extra, sometimes hefty professional fees to recruit the experts necessary to cover the work professionally.
10. Employees and contractors.
Similarly, once your workload gets to be too much to handle, or if your business starts to expand, you’ll need to rely on a network of full-time employees and independent contractors to handle the excess. You might be surprised to learn how much it costs to recruit a candidate, and the true costs of benefits—accordingly, you’ll need to plan for far more than their baseline salary.
11. Shipping and delivery.
You have to get products to your customers somehow. If you’re just starting out, you might not be able to work out a long-term contract with a major shipping supplier; instead, your costs will be high and your service might be unpredictable. It’s a difficult expense to compensate for, and one that new entrepreneurs often miss when calculating all online startup business expenses.
12. Marketing and advertising.
You can’t generate new interest and further popularity unless you invest in marketing and advertising. There are some strategies that don’t require much monetary investment (such as content marketing), but for the most part, you’ll need to put down a few hundred to a few thousand dollars to support your business here. And don’t forget to have professionally designed branding done for your business—you need to make sure you look legitimate and distinguished.
Businesses need to plan for all kinds of taxes as part of their online startup business expenses. This includes sales tax, income taxes, and property taxes (if you’re operating out of an office or physical retail location). These costs can blindside you if you aren’t ready for them.
The Time Factor for Online Startup Business Expenses
Not all costs are monetary. Creating an online business takes an inordinate amount of time. And, your time is valuable. If you spend too much personal time building and running your online business, you’ll end up short-changing yourself. You might break a profit, but you won’t be able to make what you’re worth.
To understand the depths of this issue, you must first calculate an approximation of what your time is worth. You can ballpark this by taking a look at your salary or hourly rate.
Building and managing a website requires many different skills and different kinds of experience. You’ll likely find yourself doing work inefficiently,. For example, it might take you two hours to find and install a new add-on while it would take an expert just 15 minutes. When you factor in the cost of your time against that of others, this becomes an even bigger discrepancy. If you’re worth $ 100 an hour, why would you spend two hours of your time on a project that would take someone getting paid $ 50 an hour only 15 minutes?
Key Strategies for Mitigating Online Startup Business Expenses
It also helps to apply these high-level strategies to increase your chances of success:
- Plan conservatively. Whether you’re writing your initial business plan or planning for your next quarter, be conservative with your numbers. Plan on items being more expensive. Always allow some wiggle room for each broad expense category.
- Set aside an emergency/unplanned expense budget. You should also have funds for emergencies and other unplanned expenses. You can open a business line of credit so you always have floating cash. The most important factor for success is acknowledging that unplanned online startup business expenses can and will come up.
- Update your financial model routinely. Whenever you learn of a new expense or a change to your financial outlook, take the time to update your financial model. It’s the best way to protect yourself against changes to your overall profitability and stay up-to-date with the best information possible.
- Start small. If you haven’t yet started your online business, try to start off small, with limited product and a limited market. You’ll avoid some of the bigger costs of infrastructure and expansion and give yourself a testing ground, which you can use to experiment with your existing financial hypotheses and projections.
- Generate revenue as soon as possible. Don’t wait until every aspect of your business is in place to start generating revenue; as soon as you have a minimum viable product, you should start selling it. The sooner you start generating revenue, the easier it will be to handle your online startup business expenses, and the more information you can gather about your profitability.
Not Perfect, Just Precise
You don’t have to be a perfect entrepreneur or an experienced financial forecaster to avoid the pitfalls of underestimating your online startup business expenses. As long as you’re motivated to keep your expenses low (and in control), and you’re willing to adapt to new changes, you have a chance to make your enterprise profitable.