How much does it cost to start a business in the UK?
What is the cost of running a business in the UK
Before launching a new business in the UK, it's important to have a solid understanding of the financial resources required. The cost of starting a business can vary widely depending on factors such as the chosen industry and location.
Service-based businesses generally have lower startup costs, ranging from a few hundred to a few thousand pounds, while manufacturing businesses can cost tens of thousands to millions of pounds. According to Startups.co.uk, the average cost of starting a business in the UK ranges from £2,000 to £30,000, depending on the type of business, while the average cost of starting a business in the UK is around £12,000 (The Guardian).
However, the cost of starting a business is only one piece of the puzzle. In the UK, only 42.4% of small and medium-sized enterprises (SMEs) survive past their first five years, according to a report by the Office for National Statistics. Common causes of failure include insufficient funding, lack of market demand, poor management, and increased competition.
To increase your chances of long-term success, it's important to not only budget for startup costs, but also to create a comprehensive business plan, conduct market research, and seek professional advice when necessary.
In this article, we'll provide information on the importance of calculating business startup costs, the types of expenses involved, and tools to help you organise and manage your small business finances for sustained success.
Calculate your Start-up costs
One of the most critical steps is figuring out how much cash you'll need to get started. While there is no one-size-fits-all answer to this question, there are some best practices to follow.
First, it's important to overestimate your startup costs in your business plan. For example, let's say you want to start a small online retail business. Your startup costs might include expenses such as website design and development, inventory purchases, marketing, and legal fees. You might overestimate these costs to ensure you have enough cash on hand to cover unexpected expenses, such as additional inventory purchases or unforeseen marketing expenses.
To accurately determine your startup costs, you need to have a clear understanding of how your business will operate. Seek business advice to help you decide on the best legal and financial models for your business type, as they vary based on your business goals.
Coming back to the example, in terms of legal and financial models, you might consider forming a limited liability company (LLC) to protect your personal assets in case of any business-related lawsuits. You would need to understand the costs associated with registering your LLC, such as filing fees and legal expenses.
On the financial side, you would need to choose an accounting method that works best for your business, such as cash accounting or accrual accounting. You would also need to create financial statements such as an income statement, balance sheet, and cash flow statement to understand your business's financial health and make informed decisions. Finding your right partner to help you manage your accounting and cash flow is a key factor, fidomoney counts with excellent account managers that will guide you through your journey.
Once you have chosen your business formation type and accounting principles, you can create an accurate cash flow forecast and project your revenue. These are essential components of your business plan if you are seeking investment.
Business start-up costs examples – What could you expect?
While beginning a new business, you will need to spend money on certain items in order to get it up and running.
These expenses are the costs you need to spend in order to get your business off the ground. While these expenses can vary greatly depending on the type of business you’re starting, there are some common expenses that nearly all startups have to deal with.
It's important to note that startup expenses are considered " irrecoverable costs." This means that once you spend the money, you won't be able to get it back, regardless of whether your business succeeds or fails. However, these expenses are essential for determining how successful your business will be in the early months and years of operation.
Registration costs for startups - £
When you first start your business, you must register as a sole trader, a limited company, or a partnership. When selecting which legal structure is best for your company, there are numerous advantages and disadvantages to consider. Before making a decision, make sure you understand those.
- Sole trader - You can register as a sole trader for free through HMRC’s online registration process.
- Partnership - While forming a partnership doesn't require any formal registration costs, it is highly recommended to have a partnership agreement in place. Drafting a partnership agreement may involve some legal costs.
- Limited company - Registering a limited company in the UK can cost approximately £12 if done online or £40 if done by post through Companies House. Additionally, if you wish to trademark your company name, the cost is £170. However, if you want to register your name in multiple industries, or "classes," there is an extra fee of £50 for each additional class.
Understanding the Cost of Business Premises - £££
When starting a business, one of the biggest expenses to consider is the cost of securing a business premises. While working from home can be a viable option, it may not always be the best solution, especially if your business involves having a physical presence.
The cost of business premises can vary greatly depending on the location, size of the space required, and the terms of the lease. If you are planning to rent an office space, the average rental cost in the UK is between £150 to £1500 per person, per month, according to Instant Offices. The average rental cost of office space in the UK is anywhere from £150 - £1,500 per person, per month, depending on the location and quality of the space. According to a report by JLL, the average cost of Grade A office space in London is currently £72.50 per sq ft per annum, while the average rent for office space in Manchester is £33.50 per sq ft per annum. However, keep in mind that the cost can vary greatly depending on the location and the amenities provided.
For retail space, the cost is even higher, with the average cost of £1,050 per square metre per year, to £14,000 per square metre per year, according to Statista. This is why it's important to carefully consider your options and budget before committing to a space.
When looking for a business premises, there are other costs to consider besides rent, such as business rates, utilities, insurance, maintenance and repair costs, and any necessary renovations or fit-outs to make the space suitable for your business needs.
To save on costs, consider sharing a space with another business or opting for a flexible workspace. Coworking spaces and serviced offices offer a more affordable and flexible solution that can adapt to the changing needs of your business as it grows.
Legal and insurance costs for startups - ££
One crucial aspect is obtaining the necessary licences to operate legally. Licences can be required for various activities, such as playing music or selling alcohol, and the cost will depend on the type of licence and the location of your business.
The UK government website Gov.uk provides a comprehensive list of activities that require a licence. Additionally, it's essential to have adequate insurance coverage from the day you begin operating. The main types of business insurance to consider are public liability, professional indemnity, and employers’ liability insurances. These can cost as little as £50 per year for public liability insurance, around £53 per year for professional indemnity insurance, and £40 per year for employers’ liability insurance, depending on the number of employees and the risks they face at work. As a startup, it's important to factor these costs into your budget to avoid any surprises down the road.
Transport costs for startups - £
When starting a business that requires the use of vehicles, it's essential to consider the associated transport costs.
- Purchasing or leasing the vehicles - Prices vary depending on the type of vehicle and whether it is purchased or leased.
- Vehicle road taxation begins at £165 per year for a light commercial vehicle.
- Ensuring they are adequately insured - Business vehicle insurance starts at roughly £700 per year.
- Commercial car insurance is required by law for commercial use and is slightly more expensive than personal vehicle insurance.
- Business car insurance and commercial vehicle insurance are two distinct policies that you may need based on how you use vehicles for your business.
Don't forget to factor in these costs when budgeting for your business to avoid any unexpected expenses.
Marketing costs for startups - £££
Website creation and hosting, the creation of an online store, and other technology-related expenses can add up quickly. Be sure to include these costs when planning, along with any marketing you want to do for your business.
- Website build: This can vary widely depending on the complexity of your site and the platform you use. A simple WordPress site with a basic design might cost around £1,000, while a custom-built e-commerce site with advanced features could cost upwards of £20,000 or more.
- Website hosting: Hosting costs can range from around £10 per month for basic shared hosting to £200 or more per month for dedicated hosting or cloud-based hosting with advanced features.
- Email hosting: Keeping your email domain the same as your website domain is often important for reputation reasons and consistency across your business. This is usually a lower cost, beginning at around £1 per month and up, depending on the size and needs of your business.
- Typical costs of marketing: Marketing costs can vary widely depending on the channels you use and the size of your business. For example, a small business might spend around £500 per month on Facebook ads and Google AdWords, while a larger business might spend several thousand pounds per month on a range of different marketing channels.
- Online: advertising, pay per click - look at average costs in your area/industry, content placement/sponsorship
- Social: free vs. paid, audience building
- Physical: leaflets and literature
- Marketing professional: If you choose to work with a marketing professional, costs can vary depending on their level of experience and the services they offer. You might expect to pay anywhere from £50 to £200 per hour, or several thousand pounds for a longer-term project.
Give yourself an initial budget to get set up with a brand and some online tools and software or to engage with a marketing professional. Then, adjust your budget based on your cost per customer and target acquisition goals.
Equipment and assets costs for startups - £££
- Point of Sales (POS) systems: Costs can range from a few hundred pounds up to several thousand depending on the type and features you need. For example, a basic iPad-based POS system could cost around £400-£500, while a more advanced system could cost over £1,000. fidomoney counts with a Merchant Services offer that including a POS service to suit your needs.
- Laptops and computers: The cost of laptops and computers will depend on the specifications you require. A basic laptop could cost around £300-£400, while a high-end model could cost over £1,000.
Furniture: The cost of office furniture can vary depending on the type and quality of the items you need. For example, a basic desk could cost around £50-£100, while a more premium model could cost several hundred pounds. Chairs can range from £20 to several hundred pounds.
- Office equipment: This can include items such as printers, scanners, and other peripherals. Prices will vary depending on the type and quality of the equipment you require. For example, a basic printer could cost around £50-£100, while a more advanced model could cost over £500.
- While buying new equipment and assets can be expensive, there are options to save money. Second-hand equipment can often be found for a fraction of the cost of new items.
- Stock management costs for startups - ££
When starting a retail business, it's important to shop around for suppliers to find the best deals and terms. Suppliers typically offer 30 days of credit, but as a startup, you might have to pay upfront.
Systems for repeat ordering, deliveries, and storage: You can handle these manually, but investing in technology can be helpful. Prices for these systems vary depending on your business needs and the technology you choose. For example:
- Inventory management software: Prices can range from £30 to £300 per month depending on the features and functionality you require.
- Barcode scanners and printers: Prices range from £50 to £500 depending on the type and quality.
- Shelving and storage equipment: Costs vary depending on the size and quality of the equipment. For example, a basic metal shelving unit can cost around £30, while a larger storage cabinet can cost over £100.
Employee costs for startups - £££
One of the most significant costs you'll encounter is the expense of hiring and paying employees.
Along with individual salaries, you must factor in National Insurance Contributions (NIC) and auto-enrolment pension contributions. Additionally, making provisions for holiday pay, sick pay, and maternity and paternity pay is crucial. According to an article from Entrepreneur, other hidden costs to consider include recruiting and training expenses, employee benefits, and potential turnover costs.
Some examples of how much these could cost:
- National Insurance Contributions (NIC): Employers must pay NICs for each employee earning over £184 per week. For the tax year 2022-23, the rate is 13.8% of their earnings above this threshold.
- Auto-enrolment pension contributions: Under UK law, employers must enroll eligible employees in a workplace pension scheme and contribute to their pension. The minimum contribution rate for employers is currently 3% of the employee's qualifying earnings.
- Holiday pay: UK law requires employers to provide employees with at least 28 days of paid holiday per year (including bank holidays). The amount paid for each day of holiday is determined by the employee's average daily wage.
Sick pay: Employees who are unable to work due to illness or injury may be entitled to Statutory Sick Pay (SSP) from their employer. The current rate of SSP is £96.35 per week for up to 28 weeks.
- Maternity and paternity pay: Eligible employees are entitled to Statutory Maternity Pay (SMP) or Statutory Paternity Pay (SPP) from their employer. The current rate of SMP and SPP is £151.97 per week for up to 39 weeks.
As a startup, it's essential to be mindful of these expenses when planning for expansion to avoid potential financial setbacks.
Professional advice costs for startups - £££
When starting a business, seeking professional advice from those who have gone through the process before can be highly beneficial. It can help you avoid costly mistakes and give you valuable insights into the industry. At fidomoney, we have partners and consultants that can help you get started.
However, it's important to note that professional advice comes at a cost, and startups must be prepared to allocate funds for it.
According to a report by The Guardian, startups in the UK can expect to pay between £1,000 and £5,000 for professional advice, depending on the level of support they need. The report notes that accountancy and bookkeeping are essential areas where startups require professional advice to ensure they comply with regulations and tax laws. The cost for an accountant or bookkeeper can range from £500 to £2,500 per year.
Marketing is another crucial area where startups may require professional advice to develop an effective strategy to reach their target audience. The cost of hiring a marketing consultant can range from £100 to £250 per hour, depending on their level of expertise and experience.
Legal compliance is also a crucial area where startups may require professional advice to navigate complex regulations such as health and safety and GDPR. The cost for legal advice can range from £150 to £250 per hour, depending on the experience and specialism of the solicitor.
Additionally, having a business mentor who has experience in your sector can be highly beneficial for new business owners. In the UK, startups may be able to receive mentoring through their finance provider, such as the Start Up Loan program, which offers free mentoring from a network of business mentors to its borrowers. While the cost of professional advice and mentoring may seem high, it's important to view it as an investment in your business's success.
How to calculate your business startup costs
To calculate your startup costs, make an expense list that includes the costs of everything you'll need to get your business up and running.
- Start by creating a list of all the expenses and assets that you need to start your business.
- Estimate the cost of each item on your list. Some costs will be fixed, such as the cost of leasing a property, while others will be variable, such as the cost of inventory.
- Organize your list into one-time expenses and recurring monthly expenses.
- One-time expenses include items like equipment purchases, legal fees, and initial inventory purchases. These are expenses that you will only incur once.
- Monthly expenses include items like rent, utilities, salaries, and ongoing inventory purchases. These are expenses that you will incur on an ongoing basis.
- Estimate your variable costs based on how many products you expect to sell in each month of your first year in business.
- Once you have estimated all of your expenses, add up the total cost to determine how much capital you will need to start and run your business.
If you need to calculate your startup costs, there are several tools and resources available to help you. One option is to use our spreadsheet or online template to organize your expenses and automatically calculate the total costs.
To use the template, simply input your monthly costs and the number of months they apply in the designated columns. The template will automatically calculate your total monthly costs. For one-time costs, enter the total cost in the designated column, as no further calculations are necessary.
Once you have entered all of your expenses, the template will automatically generate a total start-up cost figure. This can be useful when creating a formal report for your business plan, as it provides clear and concise figures for potential investors or lenders.
How to minimise startup costs
When starting a business, it's natural to want to keep costs as low as possible. However, it's important to consider the potential impact of minimizing startup costs. While cutting corners may seem like a good idea in the short-term, it could end up costing you more in the long run.
For example, investing in quality equipment or software may seem expensive initially, but it can save you money in the long run by reducing the need for repairs or replacements. Similarly, hiring experienced professionals may cost more in the short-term, but it can help you avoid costly mistakes and increase the chances of success.
On the other hand, spending too much money on unnecessary expenses can be just as damaging. It's important to prioritize spending on the essentials and avoid overspending on things that won't directly contribute to the success of your business.
Ultimately, the key is to strike a balance between minimizing costs and investing in what's necessary to ensure the success of your business. A good way to approach this is by conducting thorough research, creating a detailed budget, and seeking advice from professionals or mentors.
When it comes to determining your startup costs, there is no one-size-fits-all answer. The amount you’ll need to budget for will depend on a range of factors, including your business type, vision and goals.
It’s important to remember that startup costs are just one part of the picture. While it’s important to have a clear idea of what it will cost to launch your business, planning for growth is equally crucial to long-term success. This means setting aside emergency funds to deal with unexpected hurdles, developing a viable go-to-market strategy to attract your ideal audience and driving purchasing behavior, and accounting for ongoing fixed and variable costs.
To get started, you’ll need to determine how you plan to structure your company and what accounting methods you’ll use. From there, you can begin to identify which common costs apply to your specific business and start calculating expenses.
While it’s important to budget carefully, it’s also worth looking for ways to reduce costs where possible. Remember that building a successful business is a marathon, not a sprint, so it’s often better to start small and slow. The more you understand about your financial health, the better your chances of surviving and thriving in the years ahead.
When you’re ready to take the next step, opening your business account with fidomoney is a great way to get started. Not only will you be able to officially start your company, but you’ll also get your banking structure ready to pay and get paid, which is the best way to ensure your finances are in order from day one. Open your account now!