The REAL Cost Of Starting A Business
Table of Contents
Is starting and owning a business that you can proudly call your own on your bucket list? After all, what would the world be like without ambitious entrepreneurs who dare to dream big.
Starting your own business can be one of the most exciting and rewarding experiences you will encounter. However, you should dive in with realistic expectations and most importantly, a solid grasp of the REAL costs involved.
The cost of starting a business varies depending on the business model and chosen industry. Many small businesses, particularly freelance, online and home-based businesses cost a lot lower than having a business that requires a physical premise and staff.
How to start a business
The first step to opening up any business is definitely creating a detailed business plan. With a business plan in place, it will be easier to identify the different start-up costs involved.
This involves many factors ranging from industry research to marketing strategy, risk management and most importantly, a sound financial plan.
Underestimating expenses will falsely increase your expected net profit, a situation that will not work well for your business.
A sound financial plan is the core of your business plan
Therefore, it is advisable to know exactly how much it will cost to start a business. You should be able to come up with a proposed budget in your financial plan.
Projecting financial statements, such as an income statement, a balance sheet and a statement of cash flows are all part of this financial plan groundwork. A sound financial plan should project financial statements for at least five years.
The costs of starting a business
Here are a few costs that are common to all business types that you should include:
Research expenses
Careful research of the industry and consumer market must be conducted before starting any business. Do not blindly jump into it. You can talk to others that have started a similar business and do further research on the needs of your business. With easy access to the Internet, this step would be incredibly easy and effortless. These are the cheaper options.
However, if you have doubts and you want to be sure with professional insight, you can choose to hire market research firms to aid you in the assessment process. Professional market research comes at a price – which can range from RM1,400 up to RM10,000++ depending on the type of market and how in-depth the research is.
Borrowing costs
Starting up any kind of business requires an infusion of capital. For small businesses, the most likely source of financing is debt that comes in the form of a small business loan. Business owners can often get loans from banks or private investors such as family or friends. Business loans are definitely accompanied by interest payments. These payments must be planned and taken into account as the cost of default is very high when you are just starting out.
Banks usually offer up to RM1,500,000 in funding with an interest rate of approximately 5% to 15% with up to a 7-year tenure.
Let’s say you applied for a 7-year tenure RM150,000 loan with a 5.14% interest rate to start off your Malaysian-cuisine inspired café, your monthly repayment could reach up to RM2,428.
Compliance needs: Insurance, license and permit fees
All businesses would need to sort out some legal requirements before opening up. Food businesses generally would be expected to submit to health inspection authorisations before proceeding to apply for business licenses and permits. Some businesses might need to apply for industry-specific permits.
Let us use an examples of starting a cafe to discuss the costs involved. On a general overview, a food and beverage business would incur the following costs:
- Business registration fees;
- trade name: RM60 per year
- personal name: RM30 per year
- branch name: RM5 per year
- Sdn Bhd incorporation fee: RM1,000
- Solicitor’s fees: RM3,000
- Name registration: RM30
- Insurance such as public liability, income protection, vehicles, etc. (a monthly premium of RM900)
Other cost-incurring elements include licenses and permits, workers’ compensation and food handling certificates or serving of alcohol.
It is important to note that the start-up costs for a sole proprietorship will differ from a partnership. Some additional costs that will be incurred by a partnership include the legal cost and fees of drafting a partnership agreement.
Premise
Businesses can function with or without a premise. If your business nature is online or freelance, you would not require a premise. However, if you need to operate your business in a proper premise, then you need to decide the most strategic location and whether you want to lease, rent or buy the premises. Renting a 1,250 sq. ft. shop lot in Publika, Mont Kiara for your café would cost RM12,000 monthly.
Other common costs relating to your business premises include architectural plans and basic premise modifications such as electrical, lighting, painting, security system, ventilation system, plumbing, etc. For a simple café renovation, you may want to allocate at least RM250,000.
Equipment
Every business requires some form of equipment and basic supplies. Once you have decided what you need based on your business nature, you need to consider whether you want to lease or buy the equipment. This could largely depend on your financial capacity.
Items under this list include furniture, such as tables, chairs, and cabinets, as well as stationery, and a computerised cash register. If you require a delivery van, you will need to allocate costs to get and maintain company vehicles. Business-related equipment, such as large refrigerators and utensils may add up to the cost, too. You can consider getting the furniture from the factory or second-hand dealers at a lower cost. Do not forget to include safety and health items such as first aid kits, smoke alarms and fire extinguishers.
For a café, you would need to have anywhere between RM70,000 to RM100,000.
Advertising and promotion
This is particularly important when you are starting your business, as you need to have sufficient advertising and promotion to market your business in order to attract clients or customers. The public needs to be informed of the products or services you offer.
As a part of the business’s marketing needs, you need a custom logo (RM1,000), brochures (RM1,000 for 500 A2 double-sided brochures), business cards (RM40 for 3 boxes), signage (RM5,000) and web design/hosting services (approximately RM4,600 for basic design/hosting). In total, you can expect to spend about RM11,640. Depending on how elaborate and complex you want your designs to be, you can expect prices to get even higher.
Employee expenses
If running your business would require some help, then you need to hire people and they must be paid a salary and offered other benefits, such as the Employees Provident Fund (EPF), medical coverage, uniform, and safety clothing. Also, remember to include recruiting costs such as job ads.
Failure to compensate employees adequately can end in low morale and high turnover, which can be bad publicity for your business, and incur additional costs for non-compliance fines.
Let’s assume you have five employees with an average salary of RM3,000:
| Monthly cost | Yearly cost | ||
|---|---|---|---|
| Salary (RM3,000 per employee) | RM15,000 | Annual medical claims (Max. RM800 per employee) | RM4,000 |
| EPF (13% per employee) | RM1950 | Uniform (RM50 per set, 2 sets per employee) | RM500 |
| SOCSO (1.75% per employee) | RM262.50 | ||
| EIS (0.2% per employee) | RM30 | ||
| TOTAL | RM17,242.50 | TOTAL | RM4,500 |
In total, an employer of five staff needs to pay RM211,410 a year in employment costs.
Technological expenses
Technology aids any business to function more effectively and sort out daily basic business functions. This category of expenses varies according to the type of business and includes hardware like computers, printers, scanners, modems, and photostat machines, as well as software for accounting, security, documentation as well as the cost of Internet, Wi-Fi, and mobile.
For your café, you can obtain phone and Wi-Fi services from UniFi for RM199 per month, and relevant software such as payroll at RM400, inventory and billing for RM700 as well as online paid marketing (RM800 for freelancers, RM1800+ for agencies), you are looking at about RM2,099 to set up your business.
Managing costs
It is a good idea to split your costs between ongoing and one-off costs. It will also help if you overestimate costs, and include a buffer in your budget, so there are no major surprises later. One-off costs should include everything necessary to get the business ready to function on day one.
Therefore, to start up a café in the Klang Valley, in total you would require at least:
| One-off cost | Monthly cost | ||
|---|---|---|---|
| Market research fee | RM10,000 | Loan repayment | RM2,428 |
| Compliance needs | RM3,060 | Premise rental | RM12,000 |
| Premise renovation | RM250,000 | Technological expenses | RM2,099 |
| Equipment | RM70,000 | Employee expenses (Salary & EPF) | RM17,242.50 |
| Advertising & promotion | RM11,640 | Insurance premium | RM700 |
| Employee expenses (Medical coverage & uniform) | RM4,500 | ||
| TOTAL | RM349,200 | TOTAL | RM34,469.50 |
Create a business cash flow forecast next
To manage ongoing costs, you should consider developing a cash flow forecast next. This will give you a sense of when money will be flowing in and out of your business over the coming 12 months. If you are operating a cafe, other major elements that will influence your monthly budget are your food supply and utilities cost. Always stash away some cash for any overlooked or unexpected expenses.
When you are caught up in the startup excitement, the last thing you might want to consider is the exit strategy. But this should be on your next step along with planning how to scale and grow and start working on tax planning for your business.
Launching a new business can be an exciting experience. However, getting caught up in the excitement and neglecting the financial details can often lead to failure. The best would be to observe and consult with others who have travelled the road before – you never know where the best business advice will come from.
The above ballpark figures are just estimations based on rough quotations we received at the time of writing. Prices may vary based on requirements, location, and supplier/vendor.
A newly minted entrepreneur may be looking for ways to trim their company expenses. You could get started by applying for your first credit card as an entrepreneur.
