How Much Does It Cost to Start a Retail Business?
The actual costs of opening a retail store vary based on the type of retail business you want to start, the size of the store, and, last but not least, location. In New York City, the average sale price per square foot of commercial space will be 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.
Many small businesses can get started with modest costs upfront. But a brick-and-mortar retail venture will be more costly because there are expenses such as inventory and floor space costs to consider.
Start With a Business Plan
To determine how much money you need to start your business, you need to develop a business plan. The research you put into your planning should include realistic calculations for startup costs and the monthly operating expenses to run your store. The plan will also show how long it will take until your business reaches its break-even point (BEP). The 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, but lenders will also 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 their investment.
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 did not plan for will certainly arise 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 affecting your success in the long run. You can prevent many unexpected outgoings by being as thorough, accurate, and realistic as possible in the planning stages.
Basic Startup Costs
Your list of startup costs should include everything that you need to open the doors, keep them open, and plan for the future. Brainstorm to identify every single expense that you can think of—right down to the toilet paper for the bathroom—then research how much each line item will cost.
Below are some typical startup costs. The costs 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 licenses and permits. For example, an Employer Identification Number (EIN) for tax purposes, state, and local licenses as indicated by the SBA, a Resale Certificate (if you are 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 are operating.
- Store fixtures. Depending on the type and size of your business, you may need shelving, display racks, cases, and furniture.
- Initial inventory. You need to be fully stocked with inventory on opening day and enough product to last at least four months. If you do not know the exact prices of your products, use an estimated markup assumption to back into the rates you are likely to see from your distributors. For example, if you know the sweaters you want to sell normally retail for $80, you can assume that with a 25 percent margin, you’ll be able to purchase them from the manufacturer for $60.
- 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 can 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. 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 to $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. 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 the 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 are 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 type of signage 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 the 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 such as 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 is not likely to be profitable in the first several months, and it may 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) can cover your store's monthly expenses.
If you are an entrepreneur, you should pay yourself a salary to run your store. 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.
Launching any type of business requires an infusion of capital. The two ways to acquire capital for a business are equity financing and debt financing. 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. As with any other loan, business loans are accompanied by interest payments. These payments must be included in the business plan—the cost of default is very high.
What Will Your Store Cost to Open?
A grand opening event provides exposure to the community hopefully 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 99.7% of all businesses in the United States qualify as small businesses, you will be joining a huge community of entrepreneurs who are pursuing the American dream with hard work and the right planning.