The REAL Cost Of Starting A Business

The REAL Cost Of Starting A Business

In the World Bank’s Doing Business 2019 Report, Malaysia has bagged the 15th spot, a nine step leap compared to last year. Based on business regulations and ease of doing business, the report evaluates 190 economies worldwide.

Ranked in terms of starting a business, dealing with construction permits, securing electricity, registering property, trading across borders, and resolving insolvency, Malaysia comes in second among ASEAN countries, behind Singapore.

Despite it being easy, there are several steps that you absolutely can’t miss to avoid pitfalls or ending up closing your business within months of starting. Topping the list is knowing the REAL cost of starting a business.

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The cost of starting a business varies depending on the business model and chosen industry. Many small businesses, particularly freelance, online and home-based businesses costs a lot lower than having a business that requires a physical premise and staffs.

The first step to opening up any business is definitely creating a detailed business plan. With a business plan in place, it will be easier to identify the different start-up costs involved.

Underestimating expenses will falsely increase your expected net profit, a situation that will not work well for your business. Therefore, it is advisable to know how much it will cost to start a business.

Here are few costs that are common to all business types and should not be neglected.

Research expenses

Careful research of the industry and consumer market must be conducted before starting up any business. Do not blindly jump into it. You can talk to others that have started a similar business and do further research on the needs of your business. With easy access to the Internet, this step would be incredibly easy and effortless. These are the cheaper options.

However, if you have doubts and you want to be sure with a professional insight, you can choose to hire market research firms to aid you in the assessment process. Professional market research comes at a price – usually to the tune of RM4,000 for a basic research and may increase for a more in-depth one.

Borrowing costs

Starting up any kind of business requires an infusion of capital. For small businesses, 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 or private investors such as family or friends. Business loans are definitely accompanied by interest payments. These payments must be planned and taken into account as the cost of default is very high when you are just starting out.

Banks usually offer up to RM3,000,000 funding with an interest rate of approximately 5% with a 3-year tenure. If you borrow RM150,000 loan to start off your Malaysian-cuisine inspired café, your monthly repayment could reach up to RM4791.67 (5%).

Compliance needs: Insurance, license and permit fees

All businesses would need to sort out some legal requirements before opening up. Food businesses generally would be expected to submit to health inspections authorisations before proceeding to apply for business licenses and permits. Some businesses might need to apply for industry-specific permits. However, on a general overview, a food and beverage business would incur the following costs:

Other cost-incurring elements include license and permits, workers’ compensation and food handling certificates or serving of alcohol.

It is important to note that the start-up costs for a sole proprietorship will differ from a partnership. Some additional costs that will be incurred by a partnership includes the legal cost of drafting a partnership agreements fees.

Premise

Businesses can function with or without a premise. If your business nature is online or freelance, you would not require a premise. However, if you need to operate your business in a proper premise, then you need to decide the most strategic location and whether you want to lease, rent or buy the premise. Renting a 1,769 sq. ft. shop lot in Plaza Arkadia, Desa Park City for your café would cost RM7,800 monthly.

Other common costs relating to your business premises include architectural plan and basic premise modifications such as electrical, lighting, painting, security system, ventilation system, plumbing, etc. For a simple café renovation, you may want to allocate at least RM150,000.

Equipment

Every business requires some form of equipment and basic supplies. Once you have decided what you need based on your business nature, you need to consider whether you want to lease or buy the equipment. This could largely depend on your financial capacity.

Items under this list includes furniture, such as tables, chairs, and cabinets, as well as stationery, and a computerised cash register. If you require a delivery van, you will need to allocate cost to get and maintain company vehicles. Business-related equipment, such as large refrigerator and utensils may add up to the cost, too. You can consider getting the furniture from the factory or second-hand dealers at a lower cost. Do not forget to include safety and health items such as first aid kits, smoke alarms and fire extinguishers.

For a café, it would approximately cost RM65,000.

Advertising and promotion

This is particularly important when you are starting your business, as you need to have sufficient advertising and promotion to market your business in order to attract clients or customers. The public needs to be informed of the products or services you offer.

As a part of the business’ marketing needs, you need a logo (RM800), website (RM3,500), brochures (RM1,000 for 500 A2 double-sided brochures), business cards (RM40 for 3 boxes) and signage (RM5,000). To get this started, you will require services of graphic designer and website developer, while including other costs, such as domain and hosting fees (RM300) for your website. All this could add up to about RM10,640.

Employee expenses

If running your business would require some help, then you need to hire people and they must be paid salary and offered other benefits, such as Employees Provident Fund (EPF), medical coverage, uniform, and safety clothing. Also, remember to include recruiting costs such as job ads.

Failure to compensate employees adequately can end in low morale and high turnover, which can be a bad publicity for your business, and incurring additional training cost for new staff.

Let’s assume if you have five employees with an average salary of RM3,000:

Monthly costYearly cost
Salary (RM3,000 per employee)RM15,000Annual medical claims (Max. RM800 per employee)RM4,000
EPF (13% per employee)RM1950Uniform (RM50 per set, 2 sets per employee)RM500
SOCSO (1.75% per employee)RM262.50  
EIS (0.2% per employee)RM30  
TOTALRM17,242.50TOTALRM4,500

In total, an employer of five staff needs to pay RM211,410 a year.

Technological expenses

Technology aids any business to function more effectively and sort out daily basic business functions. This category of expenses varies according to the type of business and include hardware like computers, printers, scanners, modems, photostat machine, as well as software for accounting, security, documentation as well as cost of Internet, Wi-Fi, and mobile.

For your café, you can obtain phone and Wi-Fi services from UniFi for RM349 per month, and relevant software such as payroll at RM400, inventory and billing for RM700 as well as online paid marketing (RM500), you are looking at about RM1,949 to set up your business.

Managing costs

It is a good idea to split your costs between ongoing and one-off costs. It will also help if you overestimate costs, and include a buffer in your budget, so there are no major surprises later. One-off costs should include everything necessary to get the business ready to function on day one.

Therefore, to start up a café in the Klang Valley, in total you would require at least:

One-off costMonthly cost
Market research feeRM4,000Loan repaymentRM4791.67
Compliance needsRM3,060Premise rentalRM7,800
Premise renovationRM150,000Technological expensesRM1,949
EquipmentRM65,000Employee expenses (Salary & EPF)RM17,242.50
Advertising & promotionRM10,640Insurance premiumRM900
Employee expenses (Medical coverage & uniform)RM4,500  
TOTALRM237,200TOTALRM32,683.17

To manage ongoing costs, you should consider developing a cash flow forecast. This will give you a sense of when money will be flowing in and out of your business over the coming 12 months. Other major elements that will influence your monthly budget are your food supply and utilities cost. Always stash away some cash for any overlooked or unexpected expenses.

Launching a new business can be an exciting experience. However, getting caught up in the excitement and neglecting the financial details can often lead to failure. The best would be to observe and consult with others who have travelled the road before – you never know where the best business advice will come from.

The above ballpark figures are just estimation based on rough quotations we received at the time of writing. Prices may vary based on requirement, location, and supplier/vendor.

A newly minted entrepreneur may be looking for ways to trim their company expenses. You could get started by applying for your first credit card as an entrepreneur.

This article was first published on Nov 2014 and has been updated for freshness, accuracy and comprehensiveness.

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