Do This Before Starting Your Business!
Are you trying to start your own business? Doing this one step should be the very first thing you do. Not only will it save you money, but it will help take the guesswork out of what to charge your customers and clients. If you choose not to complete this step, you may have to close the doors of your business. What is this important step you should be doing every single year? It is calculating your cost of doing business.
What is the cost of doing business?
The cost of doing business is the amount of money that it takes to have your business in operation. Without covering a certain number of regular costs associated with running your business, your business cannot exist or will not be successful.
In order to calculate your cost of doing business, there will be several different numbers that you need to know. If you’ve been in business for a while, you will have last year’s number readily available. If you just started your business, you may have to estimate some of these numbers. Keep in mind than an estimation is much better than not calculating them at all. This will give you a jumping off point so that you can get an idea of how much you need to spend, and then know exactly what to charge based on what you’ve calculated.
The expenses you calculate are going to differ between each different type of business. However, here is a list of common things that you may need to take into account:
- Goods purchased
- Marketing costs
- Office supplies
- Subscriptions and memberships
- Computer and software
- Professional services and legal fees
- Labor, contractors, and employee expenses
- Postage and shipping supplies
- Health, vision, and dental insurance (for yourself + employees)
- Travel and car expenses
- Professional equipment
- Professional education and workshops
- Professional insurance
- Professional office, studio, or shop rent
- Equipment repairs
- And more!
Self Employment Taxes
It’s extremely important that you take into account all of the income taxes you will be required to pay as a self employed individual. Self employed individuals are subject to three different kinds of income tax.
- Federal income tax
- State Income Tax
- Self Employment Tax (15.3% of your taxable self employment income.)
A as a self employed individual, you do not have an employer — you are your own employer. In a traditional job where you do have an employer, that employer is responsible for paying your Medicare and your Social Security taxes on your payroll. But as a self employed individual, there’s no one who’s going to pay that for you — so you have to pay it yourself. Therefore, the 15.3% self employment tax covers Medicare and Social Security taxes. Self employed income tax is applied to 92.35% of your net earnings. After you have deducted all of your expenses out of your gross earnings, you’re left with your net earnings — and 92.35% of those net earnings are subject to that 15.3% self Employment tax. Luckily, the IRS does permit you to deduct half of your self employment tax off of your tax return.
Importance of Calculating Your Cost of Doing Business
Once you have listed out all of your business expenses, you now have an estimate of your cost of doing business. This amount is how much it will cost you to keep your business up and running. It can be extremely expensive to run a small business, but it can be even worse if you don’t calculate these costs up front.
If you do not calculate these costs up front, you may not be able to cover the cost of operation, and may be undercharging your customers or clients. Many people base their prices off of what other business charge, and this is a big problem. It is extremely important to calculate your own cost of doing business because once you have, you not only know exactly what it costs to keep your business up and running, but then you know exactly what you must charge in order to turn a profit. Many individuals skip calculating their cost of doing business because it can seem daunting and intimidating — but I have created a free template spreadsheet that will help you do so. You can plug in your own unique business expenses and the spreadsheet will automatically calculate your cost of doing business. It will also tell you exactly what you need to charge per hour based on the annual income you would like to receive.
If you would like to learn more about starting your small business, you are invited to join my completely free, brand new Facebook group for California small business owners. I post additional resources and tips and you can connect with other small business owners like yourself!
Want to learn more about starting your business? Watch the video here!
