Business planning, Finance, Funding, Legal

Five little-known costs that can sting your start-up

Michelle Hammond /

Starting a business invariably involves a series of “obvious” costs such as finding and fitting out business premises, permits and licenses, inventory and equipment, and initial marketing costs.

But according to the experts, there other less obvious costs that every start-up needs to consider.

“Start-up businesses incur many and various costs, and quite often they are caught by surprise when they discover just how much those costs can amount to,” says Marc Peskett.

Peskett is a director of MPR Group, a Melbourne-based firm providing business advisory services as well as tax, outsourced accounting and financial services to small businesses.

“Even when they have identified the costs, timing can be an issue. Finding sufficient cash at the right time in order to meet those costs can be a challenge,” he says.

“Broadly speaking, there are two groups of costs – setup and ongoing costs, and they both need to be planned for.”

“Apart from the financial cost, there’s also the time cost involved in establishing a business.”

“This needs to be factored in by a business owner, especially in those early stages when they are probably trying to do as much as they can themselves in order to save on costs.”

Greg Hayes, director of Hayes Knight, which specialises in taxation and business planning advice, say most businesses prepare an operating budget when they first go into business.

“The typical budget estimates a range of costs that the business will have, and then spreads those costs out over the year,” Hayes says.

“That’s reasonable from a profit perspective but ignores the cashflow impact, where a range of costs will be incurred on day one of the business.”

“The key is to map out all of your likely costs at the beginning and assess both the profit and cashflow impact of establishing the business.”

Hayes and Peskett identify some of the hidden costs of starting a business.

1. ASIC requirements

“Business owners that go it alone with setting up their own company often don’t do so well when addressing all the ASIC requirements,” Peskett says.

“They can particularly get caught out with accurately notifying ASIC about shareholders and their allotments.”

“Business owners also often make mistakes with tax file number, ABN and GST registrations, resulting in delays on top of the standard turnaround times for processing these applications.”

Peskett says meeting your ASIC requirements could therefore incur direct and ancillary costs.

“For example, you might require the services of a lawyer to draft contracts or documents associated with the establishment of your structure or shareholding agreements,” he says.

“Hiring the services of these professionals incur additional costs.”

“From a time cost perspective, you may decide this is a cost well incurred in order to ensure you meet all your business setup and ongoing requirements.”

“There are only 24 hours in the day, so it’s wise to identify all your costs and then determine which ones you are best placed to manage yourself and which are appropriate or important to outsource or hire others to manage for you.”

2. Loan approval criteria and establishment fees

“If you go to the bank to take out a loan to assist in funding [start-up] costs, make sure you allow for their loan establishment fees and other charges,” Hayes says.

“You may find yourself with a few thousand dollars less in available loan funds than the original amount after the bank has deducted their loan costs.”

Peskett says your bank may also require an accountant’s letter, financial statements and cashflow projections, which again could mean calling on the expertise of a professional.

3. Insurance advice

Hayes points out that insuring your business could include everything from fire insurance to public liability and workers compensation insurance.

According to StartupSmart contributor Nina Hendy, you need to decide whether you’d prefer to deal directly with an insurance company or go to a third party such as a broker.

“If you decide to go direct to an insurance firm, you will most likely be able to purchase the policies you require over the phone,” Hendy told StartupSmart.

“Or, you can seek advice from a third party. In this instance, consider approaching your bank, building society or finance company… Alternatively, you can go to an insurance agent.”

“Your last option is a broker… Brokers cost between $50 and $200 a year on top of the premium, and can advise on the best polices for your business and seek quotes on your behalf.”

“Whichever way you go, insurance policies are tax deductible.”

4. Intellectual property

This includes trademarks, patents and domain name registrations, Peskett says.

In June last year, the Internet Corporation for Assigned Names and Numbers passed a resolution to accept applications for generic top-level domain names.

Applications for the new domains were open for three months on January 12. However, it cost $174,000 to register.

Meanwhile, it’s been reported many Australian patent attorneys charge between $25,000 and $150,000 to file patents overseas – another cost that can stop start-ups in their tracks.

5. Recruitment costs

Both Peskett and Hayes agree start-ups often underestimate the cost of recruitment.

“Recruitment costs can add thousands of dollars to initial start-up costs, particularly if you need to use a recruitment agent,” Hayes says.

Peskett says recruitment and employment processes are costly, not only in terms of money, but in terms of time because they require things like job descriptions and the establishment of contracts.

He also outlines a number of ongoing costs you need to factor in, including wages, WorkCover, superannuation and payroll tax.

“[You also need to consider] becoming an employer member of the various funds, and learning and understanding your employment and OH&S obligations,” he says.

Peskett’s top five tips for managing start-up costs

  • Identify all your time and cash costs.
  • Decide which ones you should manage yourself.
  • Identify appropriate people to delegate or outsource the rest to.
  • Incorporate your costs into your budget to ensure you have the cash when you need it.
  • Review your ongoing costs and allocate them into your budget annually.

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