How Much Does It Cost to Start a Retail Business?
A detailed business plan will give you the answer
The actual costs of opening a retail store vary based on the type of retail business you're starting, the size of the store, and last but not least, location. In New York City, the average sale price per square foot for commercial space (as of 2018) can be 10 percent to 20 percent higher than setting up shop in Des Moines. And while every new business is different, the first step is finding out what your store will cost to open and putting it all down on paper.
According to the Small Business Administration (SBA), micro-businesses (for example, a tiny shoe repair venture with one employee, the owner) can get started for as little as $3,000 or less. Entrepreneur magazine reports startup costs between $2,000 and $50,000 for different retail enterprises, from antique furniture sales to musical equipment sales. A figure of $30,000 to launch a retail operation is a good median number to work with.
Start With a Business Plan
To determine how much money you need to start your business, it's best to put together a business plan. The research you put into your planning will show the startup costs and monthly operating expenses involved in running your store. It will also show how long it will take until your business reaches a break-even point. The break-even point (BEP) is the point at which cost or expenses and revenue are equal—there is no net loss or net gain.
Not only will a well-thought-out business plan give you an idea of the funds needed for your business, lender s require it. You need to prove to the bank or any other backers that your idea is a good one, that you have calculated all costs and risks, and that you are worth investing in.
Overestimate (Don't Underestimate) Your Expenses
When it comes to borrowing money for your business, the cost of financing a startup business is usually directly related to the amount of risk involved: the higher the risk, the more expensive the venture. One of the biggest mistakes many small business owners make is underestimating their expenses. Be realistic and overestimate rather than underestimate.
Costs that you didn't plan for will certainly pop up as you prepare the store for opening. Many of these oversights will be small, but some can be large and they can all add up, possibly affecting your success in the long run. You can prevent these surprises by being as thorough, accurate, and realistic as possible.
Basic Startup Costs
Your list of startup costs should involve everything that you need to open the doors, keep them open, and plan for the future. Sit down and brainstorm every single expense that you can think of—right down to the toilet paper for the bathroom—then start researching how much each line item will cost.
Startup costs include, but are not limited to, the following list. Keep in mind that the numbers are estimates. You should take into account your location and the size and type of your store:
- Rent. Make sure you have enough capital to cover your rent for at least two years.
- Licensing and permitting fees. These include numerous licenses and permits for things like an Employer Identification Number (EIN) for tax purposes, state and local licenses as indicated by the SBA, a Resale Certificate (if you're not selling exclusively independent products), a seller’s permit, and a certificate of occupancy. These costs can vary from $200 to $2,000 depending on your business and the state in which you’re operating.
- Store fixtures. Depending on the type and size of your business, you may need shelving, display racks, cases, and furniture, so research your needs thoroughly.
- Initial inventory. You need to be fully stocked with inventory on opening day and enough product to last at least four months. If you don’t know the exact prices, use an estimated markup assumption to back into the rates you’re likely to see from your distributors. For example, if you know the sweaters you want to sell normally retail for $20, you can assume that with a 25 percent margin, you’ll be able to purchase them from the manufacturer for $15.
- Equipment and technology. Essentials such as point of sale (POS) systems, computers, web access, televisions, mobile payment platforms, and other IT expenses are not cheap. POS systems cost around $2,000, with an additional $550 for each workstation. Televisions may be $300 to $500 each, while web access can cost $100 or more a month.
- Web hosting. If you want a website, you need a website builder and a host to keep it online. Free builders and hosts are available, but their capabilities are limited and may reflect poorly on your brand. Instead, expect to invest a minimum of $30–$200 a month for a website.
- Janitorial supplies and services. If you choose to hire a cleaning service, you can expect to spend between $50 and $200 a week, while personally handling cleaning in-house will likely cost $500 to $1,000 for an initial investment in supplies and heavier equipment, such as vacuums.
- Business insurance. Consider everything from property insurance including liability to workers' compensation and any coverage required for employees or yourself.
- Advertising. You may choose zero-cost word-of-mouth advertising, including working any social media platforms you're familiar with, or you may want to hire an ad agency, which will run you anywhere from $1,000 to $10,000 a month.
- Signage. The kinds of signs you choose will dictate the price but expect to spend $500 to $1,000 for interior and exterior branding.
- Interior decor and aesthetics. You may need to paint the walls, install shelving, add a counter, replace flooring, and make other changes. While some fixes can be handled independently, bigger projects may require a general contractor at a rate of $50 to $100 an hour, in addition to the cost of materials.
- Professional services. Working with a lawyer to incorporate your business or an accountant to set up your books and file your taxes can cost anywhere from $1,000 to $10,000 or more.
- Any other costs you can think of, including time clocks, security cameras, and office supplies like paper, pens, and schedule books.
You will need to cover the operating expenses until your business reaches the break-even point. Remember that your business will likely not be profitable in the first several months, and it may even take years.
You need to keep the lights on, pay employees, and cover every other expense until you hit the break-even point. This is when your monthly profit from sales (not sales, but profit) will be able to cover your store's monthly expenses.
If you are an entrepreneur, then you will most likely want to pay yourself a salary to run your store. Don't forget to include this cost, but you should only pay yourself if you are physically working in the store. There is rarely enough money in a retail startup to pay the manager and the owner.
Starting up any kind of business requires an infusion of capital. The two ways to acquire capital for a business are equity financing and debt financing. Usually, equity financing entails issuing stock, but this approach does not apply to most small businesses, which are proprietorships. For small business owners, the most likely source of financing is debt that comes in the form of a small business loan. Business owners can often get loans from banks, savings institutions, and the SBA. Like any other loan, business loans are accompanied by interest payments.
These payments must be planned for when starting a business—the cost of default is very high.
What Will Your Store Cost to Open?
A grand opening event can ensure you gain exposure in the community, guaranteeing a steady flow of customers on your first day. You can invest nothing in your grand opening. On the other hand, on the high end, you could allocate 20 percent of your first-year marketing budget or no less than $6,000 to the promotions and advertising materials that go into this pivotal day.
Whether you hold a grand opening or not, with 98 percent of all businesses in the U.S. qualifying as small businesses, with the right planning, you'll be joining a huge community of entrepreneurs that have shown that with the right planning and hard work, you can have the American dream.