No business plan is complete without an estimate of the costs that will be involved in starting-up and establishing your new business. Yet according to a new survey by online business service Geniac, many small businesses woefully underestimate their start-up costs.
Admin Costs Catch Out Entrepreneurs
The costs currently catching out entrepreneurs are admin costs such as company formation fees, accountancy, and legal and human resources services. Geniac’s survey showed that small businesses are typically paying out £22,756 in admin costs in their first year of operation – and 64% admitted they had been hit with unexpected costs in that first year.
Company formation expenses seem the worst offenders, making up 28% of a company’s total admin spend, with start-ups spending an average of £6,378 on company set-up, drafting articles of association, board minutes and shareholdings. The average cost of HR was £5,358, while typical legal costs were almost identical at £5,359.
However, the most consistently under-estimated cost was shown to be accountancy fees. Geniac found that those surveyed had on average budgeted £1,723 less than typical cost of accounting fees for existing business owners in their first year, which Geniac found to be £5.661.
As for where it’s costliest to set up a new business – it’s no surprise that Geniac’s survey identified London as the most expensive place to establish your start-up, with typical admin costs of £30,210. Yet the nest most expensive region, a little surprisingly, was the North East at £26,376.
The cheapest place? Wales, which with set up costs of just £8,095 seems a considerably cheaper place to set up your business than even the second cheapest region, Yorkshire, with first year costs of £11,454.
The Menace of Miscalculation
This kind of gross miscalculation of initial expenses can have a far-reaching and negative impact on a new business. Respondents identified the consequences of cost miscalculation as:
- Suffering profit losses (23%)
- Having to readjust growth targets (21%)
- Having to let staff go (7%)
The Geniac survey said these are “all factors that increase the likelihood of business failure.”
Mike Galvin, co-founder of Geniac, said, “It’s concerning that start-ups and small businesses are not only losing profits and staff but are readjusting growth plans because they’ve underestimated the cost of starting up. It’s even more worrying that they are over-paying in nearly every area of business administration – in nearly every part of the country.”
This survey serves as a timely reminder of the importance of getting accurate quotes and financial information when considering a start-up and writing a business plan. This isn’t the stage to take short-cuts or make rough guesses, so do your homework!