The dramatic and consistent growth of online businesses is driven by customers’ demands and changing shopping habits. Therefore, if you want to venture into the eCommerce business, you are likely to break even within a short time. Before diving into an online business, the first consideration is the costs associated with the venture.
Most people overestimate the ease of entry into online business opportunities. While the costs are significantly lower than businesses with physical space, you should still consider the following expenses.
Business Start-up Costs
When starting an online business, you need start-up capital to acquire the items for running the business. While these are sunk costs (unrecoverable), you cannot begin operations without spending the money. Business start-up costs are usually grouped into two: investigatory and pre-launch expenses.
You will use investigatory costs to research the market and potential needs of the business. At infancy, an online business needs to determine the consumer niche it wants to sell to and the products to sell. Aside from the feasibility study, investigatory costs also cover analysis of comparable products on the market and competitors’ strengths and weaknesses. Start-ups also need to research the labor supply and the licenses they need before setting up the business.
On the other hand, pre-launch costs cover the infrastructure set up to ensure the smooth running of operations. That can include digital infrastructures like Wi-Fi and payment processing systems for setting up a payment gateway or a merchant account. Some of the payment processing systems require fees for creating the accounts.
Payroll
When you are starting a business, employees will help you get your idea off the ground. For instance, if it is an eCommerce business, you need staff to pack and deliver the product. Does Fedex deliver on Sunday? However, some start-ups handle all aspects of the company without help. If you decide to hire employees, include payroll costs as part of your initial expenses. It is also crucial to determine if you will employ full-time, part-time, or freelance contractors. Each type of employee comes with unique costs. For instance, a full-time employee needs allowance, health insurance, and pension, while freelance hires are paid on a contract basis. Therefore, determining your payroll budget will help you choose the best option that suits your financial capability.
Marketing and Web Presence
You cannot rely on shoppers discovering your shop by accident. Hence, you need to market your brand and improve your online visibility. Successful online businesses spend a lot of money on marketing to drive traffic and remind their customers of the products and services they offer. Marketing costs of start-ups will vary depending on the type of business, but most of the marketing money goes towards social media campaigns, adverts, and email campaigns.
Since your business is entirely online, set aside expenses for creating a web presence. For instance, you need domain hosting and a developer to design your website. If you have plans to scale your start-up, an advanced hosting plan will serve you better. If you build an eCommerce store on a platform like Shopify, sometimes you have to pay subscription costs and fees. When you have a website up and running, you can start marketing through various media channels. Paid adverts usually increase your traffic faster and are a worthwhile marketing cost to consider.
Fees, Taxes, and Licenses
Permits and licenses aren’t for brick-and-mortar businesses only; most online businesses need licenses and must file tax returns to stay in operation. For instance, if you are offering professional services, an occupational license is necessary to operate legally. Besides, you will incur professional fees to hire lawyers or accountants to deal with copyright issues and draft legal contracts.
An online business also pays insurance fees to cover potential risks in the company. While the risk protection priorities differ from one company to another, you should have some form of insurance. Start-ups often need employer’s liability insurance to cover employee accidents at the warehouse or during delivery. Professional indemnity insurance can also protect your company if a customer files a complaint about a breach of confidentiality. Aside from fees and licensing, online entrepreneurs need to plan for various types of taxes and ensure they file all returns from income taxes to sales taxes.
Setting up Your Budget
To manage the start-up costs, create a budget that covers the items you need to launch the business. However, you should also have an emergency fund to cover unplanned expenses. If your current budget doesn’t cover emergency funds, open a business line of credit to ensure you have liquid cash for any unexpected costs. As your business grows, update your financial model and budget to cover the additional operating expenses.
Conclusion
Underestimating your online business expenses has many pitfalls and can derail your start-up before it is up and running. Therefore, it is crucial to keep all the start-up costs in mind before starting your online business to avoid financial constraints from the beginning. The above breakdown of expenses helps you prioritize what you need.
