Module 9

Lesson 1: Understand Startup Costs

Context:
After understanding Go-To-Market (GTM) strategies, sales, and
marketing, it's important to grasp the financial foundation required
to bring your business idea to life: startup costs.

Startup costs include all the expenses involved in starting a new

business. These cover one-time expenditures such as legal fees,
permits, and licenses, as well as initial operational costs like office
space, equipment, technology, and marketing campaigns.

Understanding the full scope of startup costs ensures you are

financially prepared to launch and sustain your business during its
critical early stages, setting the stage for successful
implementation of your GTM, sales, and marketing strategies.
Program overview,
and your Venture Journey
over 14 weeks
Concepts Covered in this Lesson
Types of Costs in running and Start-Up Costs as per stage
managing a business
● What are Start-up
● Onetime/Recurring costs?
● Direct/Indirect ● Understand:
● Capex/Opex o Pre- Launch Costs
o At Launch Costs
o Growth Costs
Costs management & its benefits

Best practices of cost

management

Cost Management Introduction to Unit

● Benefits Economics
● Do’s
● Don’ts

After completing this lesson, you will be able to:

● Understand various types of costs associated with any
business
● Learn about startup costs based on the stage/maturity of the
venture​
● Identify key costs for your new venture​

Steps for you to take:

● Understand the costs of a startup
● Understand the type of costs you will incur due to the stage
and type of your start-up
● Estimate the costs you will incur in the first 6 months of
operations
Start-Up Costs

Startup costs are the expenses required to get your new business
off the ground at the different pre-venture stages.

These include one-time and initial operational expenses that

ensure your business is ready to operate smoothly and efficiently
from day one.

Startup costs are generally divided into three buckets based on

the stage of your start-up:

- prelaunch costs
- at launch costs, and
- growth costs.

Prelaunch Costs

Prelaunch costs are incurred before your business officially opens

its doors. These are essential investments to prepare your
business for a successful launch. Key prelaunch cost heads
include:

1. Market Research: Expenses for conducting surveys, focus

groups, and other research methods to understand your
target market, customer needs, and competitive landscape.

2. Business Plan Development: Costs for drafting a

comprehensive business plan, which may include hiring
consultants or using business planning software.

3. Product or Service Development: Expenses for designing,

developing, and testing your product or service, including
prototype creation and refinement.
 4. Branding and Logo Design: Costs associated with creating
your brand identity, including hiring designers for logos, brand
guidelines, and other visual elements.

5. Website Creation: Expenses for developing a professional

website, which may include hiring web developers,
purchasing domain names, and hosting services.

6. Initial Inventory: Costs for procuring the raw materials for the
first batch of products or raw materials needed to start
production or sales.

7. Legal Fees: Expenses for legal services such as incorporating

your business, trademarking your brand, and drafting
contracts and agreements.

8. Permits and Licenses: Costs for obtaining necessary permits

and licenses required to legally operate your business in your
industry and location.

9. Office or Production Space: Initial costs for securing and

setting up office or production space, which may include
rent, security deposits, and any necessary renovations or
furnishings.

At-Launch Costs

At-launch costs are the expenses incurred when your business

officially opens its doors and begins interacting with customers.
These costs are focused on making a strong initial impact and
ensuring your operations are ready to meet customer demands.
Key at-launch cost heads include:

1. Marketing & Advertising: Expenses for launch campaigns

designed to drive awareness and customer acquisition
 through various channels such as social media, email
marketing, and paid advertisements.

2. Inventory & Production: Costs for purchasing the initial stock

of products or materials needed for production to ensure you
can meet customer orders from day one.

3. Website & Platform Launch: Finalizing and launching your

website or online platform, including any last-minute tweaks,
testing, and optimizations to ensure a smooth user
experience.

4. Events & Promotions: Costs associated with organizing

launch events, product demos, or special offers to attract and
engage customers, creating buzz around your new business.

5. Professional Services: Fees for hiring consultants,

freelancers, or agencies to handle launch-specific tasks such
as PR, graphic design, or technical support to ensure a
successful and professional launch.

Growth Costs

Growth costs are the expenses incurred as your business expands

and scales operations to meet increasing demand and pursue new
opportunities. These costs ensure that your business can sustain
its growth trajectory and continue to thrive. Key growth cost heads
include:

1. Marketing & Customer Acquisition: Ongoing expenses for

marketing campaigns, SEO efforts, social media
management, and content creation to attract and retain
customers.
 2. Operations & Personnel: Costs for salaries, benefits, office
expenses, supplies, and other ongoing expenses necessary
for the day-to-day running of the business.

3. Product Development & Maintenance: Continuous investment

in improving products, fixing bugs, and developing new
features to stay competitive and meet customer needs.

4. Customer Support & Service: Expenses associated with

providing customer support, including hiring support staff,
implementing support systems, and handling customer
issues.

5. Growth & Expansion: Costs related to scaling your business,

such as additional marketing efforts, hiring new employees,
expanding infrastructure, and potential fundraising activities
to support growth initiatives.

Types Of Costs

Costs can be categorized in many different ways as per the

objective of the categorization. This can be confusing for a person
new to finance particularly in a startup.

Costs can be categorized in many different ways depending upon

the context or purpose including their nature and impact on
operations.

The most common ways of differentiation that start-ups must be

familiar with include categorization based on their:

1. Nature or element (direct/indirect)

2. Behaviour (fixed/variable/ semi-variable)
3. Financial reporting (capex, opex)
 Here is a table that explains the various costs that you will likely
incur in your business.

Cost Type Description Example

Categorization of costs basis ‘financial reporting’ include:

Onetime Costs Expenses that occur only once, Legal fees for business
usually during the initial phase of the incorporation, purchase of
business. These costs are meant equipment for starting up.
usually to setup the business.

Capex (Capital Long-term investments in assets Purchase of machinery to

Expenditures) that will be used for more than one scale up operations, new
year. The purpose is to expand the office building for
business’s capacity or increase expansion.
efficiency.

The core differentiation is that

Capex refers to long-term
investments in physical assets,
occurring throughout the business
lifecycle, while onetime costs are
singular expenses that do not recur
regularly.

Both can occur during startup or

operational phases.

Recurring Costs Ongoing expenses that occur Monthly rent, salaries,

regularly to maintain business utility bills
operations. These are related to the
core business activities of the
business and are necessary for the
business to run and generate
revenue.
Opex (Operational Short-term expenses required for Monthly rent, utilities,
Expenditures) the day-to-day functioning of a office supplies, Salaries,
running business. Inventory costs, R&D, Cost
of Goods Sold (COGS)…
Opex could be fixed or recurring.

Costs can be categorized basis their behaviour as Fixed vs Variable

Costs (based on how they change with production volume):

Fixed Costs These are costs that do not Rents, utilities,

change proportionate to the level insurance, basic
of production or sales. marketing, basic
machinery (if any)
In a start-up, even when you have administrative costs etc.
no sales, these costs would
accrue.

Variable Costs These are costs associated with Manufacturing labor

the direct sale of a product or costs, packaging,
service. shipping, sales
commission etc.
These costs typically change
proportionate to the product or
sales of goods and or services.

Another categorization of costs basis their ‘nature’ or ‘element’ is Direct

vs Indirect Costs (based on how easily they can be traced to a specific
product or service):

Direct Costs Expenses directly attributable to the Raw materials,

production of specific goods or manufacturing labor costs
services that are sold by the associated with specific
business. product or service.
 Many direct costs are variable, but
some may have a fixed portion.

Indirect Costs Expenses not directly tied to Office supplies,

production but necessary for administrative salaries
general operations. where teams overlap
across multiple products
Most indirect costs are fixed costs. or services.

While all businesses share common cost classifications such as

one-time versus recurring, direct versus indirect, and capital
expenditures versus operational expenditures, the nature of each
business dictates a unique combination of costs.

For instance, a restaurant's costs heavily revolve around

ingredients, labor, and rent for its physical space, whereas a
manufacturing business may primarily incur expenses related to
raw materials, machinery, and factory overhead.

On the other hand, a SaaS company's costs are predominantly

associated with software development, cloud hosting, and
customer support.

Cost Management and its benefits

Costs of running a business has a direct impact on the venture’s

sustainability and profitability. The primary objective of any
business is to keep its costs low and increase its profitability.
The requires an entrepreneur to carefully manage costs at each
stage of the business, making judgement of what costs are critical
at which stage of the business and for what purpose and to meet
what objectives.
Costs management therefore becomes a critical skill of the
founders…many founders think that is the job of a Chartered
accountant…in reality that is the most important thing that a
startup has to understand beyond creating value for the
customers.

Businesses encounter challenges in cost management due to

various factors.
1. Operating in complex environments with multiple interrelated
factors affecting costs demands comprehensive analysis and
coordination across departments, particularly for larger
organizations.
2. Fluctuations in market conditions, technological
advancements, and globalization further complicate cost
management efforts, requiring agility and foresight to adapt
effectively.
3. Additionally, the interplay between cost management and risk
management is critical, as unforeseen events such as natural
disasters or geopolitical tensions can disrupt supply chains
and impact profitability.

Despite these challenges, prioritizing cost management remains

essential for maximizing profitability, maintaining
competitiveness, and ensuring financial stability in today's
dynamic business landscape.

Some of the biggest benefits of managing costs are:

● Profitability: Effective cost management is essential for

maximizing profitability, ensuring sustainable growth, and
generating returns for shareholders.
● Competitiveness: In today's competitive business landscape,
cost optimization is critical for maintaining a competitive
edge, attracting customers, and retaining market share.
 ● Financial Stability: Prudent cost management helps
businesses maintain financial stability by avoiding
unnecessary expenses, managing cash flow effectively, and
minimizing financial risks.
● Resource Optimization: By optimizing costs, businesses can
allocate resources more efficiently, investing in areas that
drive value creation and strategic growth initiatives.
● Adaptability: Prioritizing cost management fosters
organizational agility, enabling businesses to respond
effectively to changing market conditions, technological
advancements, and emerging opportunities or threats.

Some dos and don’ts of Cost Management are:

Do’s:

Don’ts
Effective cost management entails distinguishing between fixed
and variable costs, as well as recognizing direct, indirect, capital,
and operational expenses.
It is crucial not to underestimate costs and overestimate revenues
to maintain financial stability. Utilizing budgeting tools and
financial forecasting methods facilitates informed
decision-making. Seeking professional help early on can provide
valuable guidance and support in managing costs effectively.

Introduction to Unit Economics

Unit Economics refers to the economics of a single unit of your
product or service. It refers to the direct revenues and costs
associated with a particular business model, calculated on a
per-unit basis. It helps businesses understand the profitability of
their products or services at the most granular level.
More specifically, think of it as a detailed breakdown of the costs
associated with acquiring a customer and the revenue they
generate over time.

Key Components of unit economics include:

1. Revenue Per Unit: The amount of money generated from
selling one unit of a product or service.
2. Cost / Unit: The total cost incurred to produce, deliver, and
sell one unit. This includes direct costs like materials, labor,
and manufacturing, as well as variable costs associated with
production.
Example: For a subscription box service
● Revenue per Unit: The price a customer pays for one
subscription box.
● Cost per Unit: Costs include the box, contents, shipping, and
marketing.

Break-Even Point: The point at which total revenue equals total

costs, indicating that the business is not making a loss but also not
yet profitable.
Understanding and optimizing unit economics is essential for the
sustainability and growth of a business.

Call-To-Action
The below steps are suggested for you to systematically begin to
work through the pre-launch costs for your venture idea
List Startup Expenses:
- Begin by listing all potential expenses your startup will incur
in the next six months.
- These could include costs related to product development,
marketing, operations, staffing, technology, legal fees, office
space, utilities, etc.

Categorize Costs:
- Categorize your list of expenses into one-time costs and
recurring costs.
- One-time costs are expenses that occur only once, such as
equipment purchases or initial website development.
- Recurring costs are ongoing expenses that repeat at regular
intervals, such as rent, utilities, salaries, marketing
subscriptions, etc.
Estimate Costs:
- Estimate the amount of money required for each expense
over the next six months.
- For one-time costs, consider the total cost and divide it by six
to determine the monthly expense if applicable.
- For recurring costs, calculate the total amount expected to
be spent over the next six months.

Consider Contingencies:
- Factor in any unforeseen or miscellaneous expenses that may
arise during the six-month period. It's essential to have a
buffer for unexpected costs.

Summarize and Review:

- Summarize your one-time and recurring costs in a clear and
organized manner.
- Review your list to ensure that all necessary expenses have
been accounted for and that your estimates are realistic.

Reflect:
- Reflect on the total projected costs for your startup over the
next six months. Are there any areas where you can reduce
expenses or optimize spending?
- Consider how your identified costs align with your startup's
overall goals and objectives.