How much should small business owners pay for real estate?
The answer is found in your rent-to-revenue ratio. To find this number, divide rent/revenue. A healthy business will get a result between .02 and .2 (or 2% and 20%).
For retail businesses, you want this percentage to be close to 5%. For service businesses like accountants, this ratio can sit higher around 15%
Inventory and raw materials
Inventory and stock costs are some of the most important expenses for your businesses. If you don’t buy sock, you won’t have anything to sell.
If you are a restaurant or other hospitality business, you will also need to purchase inventory to create your menu items as well as stocking the bar.
Depending on the scale of your business, purchasing these items will have variable costs. The cost per item will be especially high for luxury stores that sell high-end fashion or speciality stores that offer expensive equipment. Simply outfitting your store can quickly cost $100,000.
In any event, you will need to crunch numbers carefully to decide how much inventory to purchase. Some factors to consider include:
- Demand: Analyze your market to determine what your expected sales volume will be.
- Storage space: While you want to stock your shelves so your store doesn't look empty, having too much inventory can end up costing you more. Likewise, having perishable items sitting in storage could increase your shrinkage costs.
- Liquid capital: Don't invest all your cash into inventory. Make sure to have extra funds for other unexpected expenses which are sure to arise.
- Profit margin: If you have high margins, you can get away with selling fewer items. If you have low profit margins, you will need to sell many items to stay in the black.
Equipment and supplies
When calculating the cost of setting up a business, many neglect to factor in the tools likely needed to operate smoothly. For small stores, these items can be quite inexpensive. For large restaurants, this equipment could make up a significant portion of your business costs.
Retail businesses may need:
- Retail displays and signs
- Shelves
- Shopping bags and packaging
- A retail POS system
- Uniforms
Hospitality businesses may need:
- Tables and chairs
- Kitchen appliances
- Dinnerware and napkins
- A hospitality POS
- A kitchen display system
- Uniforms
- Decor and lighting
Administrative affairs
Whether you work from home or have a giant store, your business will need to comply with local laws and process many behind-the-scenes tasks. No matter if you handle these administrative items yourself or hire someone to assist you, they will affect your bottom line.
Make sure to account for the following items in your business plan when calculating your startup costs:
- Licensing and permits
- Business insurance costs
- Payroll
- Taxes
- Utilities
- Legal services
- Office supplies
- Software
Advertising
The global economy keeps growing, and with it comes increased competition. No matter how good your products or services are, you need to market them to prevent someone else from taking away your customers. Calculating the cost of starting a business without sales and marketing expenses is useless, as the initial investment requires profit once the business is established.
Advertising costs could vary wildly depending on your business model. For example, a gas station likely doesn't need to do much more than set up roadside displays. On the other hand, a restaurant located in a shopping plaza might need billboards, Google advertising, social media posts, and more.
Although marketing comes at a cost, it does not have to be considered a loss. With the right approach, you can generate a positive return on ad spend that helps your business grow.
