Expenses You Don’t Think of When Starting a Business

I ruffled a few feathers with my recent post The Software Product Myth. The unrest surrounded my statement that making $2500/month from your software product wouldn’t allow you to quit your day job.

The comments here and on a few social bookmarking sites mentioned that you could quit your day job if you wanted to, and that you could live on $2500/month just fine in many cities in the world (although in my hypothetical situation I was speaking about a developer based in the hypothetical U.S.).

We could get into a discussion about how much developers make, and how many costs you will take on by quitting your day job, but it’s completely irrelevant.

The Point
The point of The Software Product Myth is that at some point you are going to have too few sales to support yourself monetarily, yet too much work to fit comfortably into your evenings and weekends. Whether your number is $1000/month, $1500/month, or $5000/month has zero bearing on that point…what matters is that building a product is a lot more difficult than most people make it out to be.

With that said, one of the helpful points that came out of the discussion is how many expenses you encounter when starting a company that you never knew existed.

Remember that line item on your paycheck that said something about retirement matching?

Or the disability insurance your company offers that you never knew they paid for?

Yeah, those are going to hurt.

You can go without these expenses for a short time while in startup mode, but if you plan to build a company that’s sustainable in the long-run you’re going to need to cover these expenses before you think about collecting a salary.

The Expenses
In putting together this list I looked through some of my old posts and also scanned my recent bank and credit card statements. I’m amazed at how many business costs I pay throughout the course of a year.

Depending on your country of residency these may not apply to you (people with national health care – consider yourself lucky!), but most of them apply in one form or another throughout the world. In addition, it is unlikely you will need every one of these expenses, but the intent is to be as close to an all-encompassing list as possible.

Core Business Expenses

  • Business Filing Fees - This includes your business license, fictitious name statement, and reseller license fees (if applicable). They tend be paid annually and vary widely, but for a sole proprietorship (in the U.S.) you’re looking at around $100/year. L.L.C.s and Corporations range from a few hundred dollars into the thousands.
  • Accountant - Business taxes, especially if you have a home office, are easy to get wrong. As I said in The Five Minute Guide to Becoming a Freelance Software Developer, an accountant is not an optional expense. Costs range from $300-$1000 per year.
  • Lawyer - Lawyers I’ve worked with run $150/hour and up. If you want contracts that will hold up in court you’re going to drop serious coin with our friends in the legal profession.
  • Liability/ E & O Insurance – Varies widely, typically from $1500-$2500/year.
  • Health Insurance – In the U.S., decent insurance for a family of three is now hovering around $800/month. It’s less if you’re single.
  • Disability Insurance – It varies, but typically runs $250-500/month in the U.S. You may think this is optional, but consider that during any given year you are 4x more likely to become disabled than to die.
  • Life Insurance – While you probably don’t need it if you don’t have a family, it’s a good idea to have if you’re married (and I would argue a requirement if you have children). If you’re young and go with term life insurance you’ll pay $10-20/month, but as you age that will increase dramatically into the hundreds.
  • The “Employer” portion of Social Security (FICA) and Medicare – Often called the “self-employment tax,” it eats up an additional 7.65% of your gross income if you’re self-employed (since your employer usually picks up this portion).
  • Retirement - Save for a rainy day. No one’s matching your 401(k) anymore, and you should be putting away at least 10% of what you make.

Technical Expenses
A few of these apply only to companies that build software, but most apply across the board.

  • Windows Hosting - You can go cheap, but you’ll pay in other ways (don’t say I didn’t warn you). Decent hosting with decent support will run $20/month. I recommend DiscountASP.NET (even though they have a terrible website). They are responsive to support issues and very  developer-centric. They roll out new .NET frameworks and while they are still in beta, and they are inexpensive considering the service and uptime.
  • Linux Hosting – The same sentiment as Windows Hosting, but $10/month will serve you pretty well. As always, I recommend DreamHost, even with my recent blog issues. Did I mention the issue turned out to be a WordPress plug-in?
  • Bug Tracking - You can go open source and save money, but you may lose it eventually in the time you spend maintaining and upgrading it. This one’s your call. I’ve chosen to outsource my bug tracking to FogBugz, and it runs me $25/user per month. Pricey, but based on my hourly rate it’s cheaper than the open source solution I used previously when you factor in upgrades, crashes, and manual workarounds for missing functionality.
  • Source Control – This is one place where you can probably get away without spending any money, but I wanted to mention it anyway. As I discussed in Source Control for Micro-ISVs, I use DreamHost for hosting my Subversion repository, as it comes free with their base hosting account.
  • Advertising - This will vary widely, but a decent Adwords budget will run $100-600/month (though it should be paying for itself).
  • Graphic Design - Here’s another danger zone where developers cost themselves money by trying to design their own graphics. Please, I beg you, pay someone to design your web site.
  • Phone - $20/month for a land line. $50-100/month for a cell phone with a decent chunk of minutes.
  • Internet - $20-60/month.
  • Fax Service or Fax Machine – It seems like it should be brought into the back yard and shot, but I still send a couple faxes each month. eFax will run you $14/month (annual plan) or if you have a land line you can fork over $50 for a fax machine (or buy a multi-function printer).
  • Printer - A color laser will run you $300-600 these days (I love my new Samsung Clx-3175fn). If you’re fine going old-school you can get a B&W laser for around $80. Either way, the toner is what kills you. Set aside $50-150/year for toner and paper.
  • Computer – If you’re writing software you’re probably upgrading your PC every 2-3 years. Figure $1,500 for a new laptop, $700 for a desktop, give or take a few hundred.
  • Software - If you’re one of those lucky Ruby or PHP developers then most of your tools are free. If you work with .NET be prepared to pay $1000-2000 for an MSDN subscription (or if you’re developing a product talk to Bob Walsh, get signed up with Microsoft BizSpark and get the same thing for a few hundred bucks).

Based on the above, you can probably see how $2500/month isn’t going to keep you in the lifestyle you’re accustomed to…it’ll barely keep the doors open.

Of course, this is far from an exhaustive list. If you have additional items that have caught you by surprise as you’ve started your business, please post them in the comments.

Update:I’ve received a lot of email with information about using $1 Linux hosting, $1200 laptops, $100 printers, etc… I already know about these options, but saving $9 per month doesn’t change the point of this post, and as I said above, if you go with cheap hosting/laptops/printers “you will pay for it in other ways.”

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51 comments ↓

#1 Michael Langford on 01.08.09 at 12:35 am

Partners/Corporate Boards should always buy life insurance for all key persons in the company (with the company as the beneficiary). Everyone has a real chance of sudden death: Don’t make your business get hosed if that happens.

This is available cheaply, and usually comes with a free 50k life insurance policy for the person to allocate to their family.

#2 AJ Finch on 01.08.09 at 6:09 am

Rob,
You share some fantastic stuff here. this is a fantastic list, and really helped me plan where I’m going with my project (or at least, how quickly I’m going to get there).

Thanks

#3 Matt Youell on 01.08.09 at 6:16 am

Other costs I immediately thought of: if you have someone doing payroll for you, if you use quickbooks, and if you need to hire a bookkeeper. It adds up. Thanks for this post.

Btw, your list of core expenses is almost a Joel Test. :)

#4 Inflecto [Software Developers] on 01.08.09 at 9:05 am

We are a small development company which develops bespoke software. The problem for us is we often need to get people in at short notice to do small amounts of coding, however, were not quite busy enough to get another full time employee.

If you have to get a contractor through an agency under these circumstances it costs a fortune and will eat a gaping hole in your project budget.

#5 Jon on 01.08.09 at 9:47 am

$100 a month for a cell phone unless your business runs on Skype.
$100 a month for Cable broadband unless you live close to a coffeeshop.
Membership fees for Rentacoder, elance, etc.
Office supplies, stamps, & business cards.

#6 Jake on 01.08.09 at 10:28 am

It can’t be stressed enough. Get a part-time book keeper to make sure your expenses are legit, your bills are paid, and your receivables are getting in on a timely basis.

When the tax man cometh, he means business.

Another thing you’re going to want to budget for is advertising. Word of mouth is great, but when your nose is buried in code you don’t have much time to do anything else. (especially if you’re a one or two-man shop).

There are local marketing guys that can assist, but be smart where to spend your money. Google adwords is expensive if you don’t do it right – not to mention meaningless.

Budget a certain percent of each project to future advertising. This way you can keep the sales funnel rolling when your knee deep coding.

#7 Drew on 01.08.09 at 10:28 am

“Please, I beg you, pay someone to design your web site.”

Smartest thing I have read on the internet all day, well done sir.

#8 Seb G on 01.08.09 at 10:35 am

A small overlook that ended costing us money and time was patents. 20k per patent is something anyone in the software industry should think about.

#9 Tom B. on 01.08.09 at 10:42 am

I gave up my own business after 7 years. I was profitable and successful, but by no means did I get wealthy. It’s much easier to work for someone else and put up with the BS. You’ve created a nice list, and its fairly comprehensive. Well done!

#10 Timothy on 01.08.09 at 11:33 am

Hmm. Nice post. thanks!

There were a few things in here that I was not prepared for, but now I can say I am.

Delicioused…

#11 Peter Bengtsson on 01.08.09 at 11:36 am

And then you’ll need an expense management system (preferably web based) that’ll set you back a further $11/month on http://www.snapexpense.com

#12 fufter on 01.08.09 at 11:53 am

What kind of rates would leave you with 2500 a month?

If you count 40 hrs a work week, thats 160 hours a month.

Let’s take 2 months vacation a year, one month calling in sick and another 3 months out of work, in between projects as a freelancer, that would leave you around 6 months a year working those 160 hrs.

An average of 2500 a month gives 12 * 2500 a year = 30000, divide by the 6 effective months: leaves you 5000 gross to bring in for 6 months each year.

To rake in 5000 gross in a 160 hours month you have to charge your customer a stunning: 31.25 hourly rate.

I mean, as a freelancer you will not have a problem to get that kind of rate, and if you deliver decent work, being hired for 6 months a year is also not going to be a major nightmare.

So, even if you ask 60 an hour (which still happens to be much lower than average in my area), you’ll easily earn an average of 5000 gross for just 6 months of full time work.

That will surely leave enough for insurance, taxes and everything else.

#13 angelo on 01.08.09 at 11:54 am

i work for a internet marketing company.

only for us (currently 1 employe == me! and 2 bosses) it takes about 30K a month to run it, including a rack at a one-block-away datacenter

#14 Brock Rodgers on 01.08.09 at 11:55 am

Expenses run about $375 a month. Still only one employee(me) after 10 years of business. IF necessary, I contract work to American programmers (because they understand English). At the highmark, I take in $6500.00 a month. No, I am not getting rich but – I don’t swim in the office politics pool and avoid BS from idiot middle managers too.

It is not for everyone but, I sure like it. It Beats working for “the man”.

#15 Rob on 01.08.09 at 11:56 am

@fufter – Thanks for the input. You are correct, as a freelancer it’s not difficult to make $2500/month.

My original post discussed marketing and selling a software product, where achieving $2500/month in revenue is quite a task.

#16 Startup Expenses You Might Not Have Thought About | KillerBlog on 01.08.09 at 1:08 pm

[…] can catch the full list here. What does this mean for you? That if your startup isn’t making enough to cover these expenses […]

#17 Derek W on 01.08.09 at 1:25 pm

$14 a month for “a couple faxes”? So, you’re okay with spending $7 per fax if you only send “a couple”??? Your local supermarket will let you use their fax machine for $1. I’m sure you can save some money there.
Linux hosting is virtually free with NearlyFreeSpeech.net

#18 Rob on 01.08.09 at 1:28 pm

@Derek – But you’re not thinking of the time it takes to drive to the supermarket, wait in line, drive home, etc… That’s at least 30 minutes per fax. At a developer’s hourly rate there’s no doubt that $7/fax is the better choice.

#19 Bob Dobbs on 01.08.09 at 2:24 pm

I’m taking in about 2200/month from my product and I quit my day job when it was 1800 with relative ease. I guess I should be thankful that my company is hypothetical or I’d be screwed….

#20 Bob Dobbs on 01.08.09 at 2:25 pm

er…*isn’t*

#21 Rob on 01.08.09 at 3:12 pm

@Bob – :-) Congratulations on quitting the day job.

Please tell me more…I’d love to hear how you’ve done it.

First of all, in what city do you live?

Second, would you mind sharing how much you pay for rent, car insurance, health insurance and disability insurance, and if you put anything into retirement?

You don’t have to share exact numbers, but hearing that you lived “with ease” on $1800/month is intriguing. In Boston, that’s the cost of a nice 2-bedroom apartment.

#22 Steve on 01.08.09 at 3:19 pm

what voip’s do you recommend that are dirt cheap? are there any that are free?

#23 Greg on 01.08.09 at 3:25 pm

What comes to my mind is all the little extraneous re-curring expenses like subscriptions to trade journals or safaribookshelf type products. Its hard to gauge their value over time but they can accumulate and can be rather insidious especially if they are automatically charged against your account.

#24 Greg on 01.08.09 at 3:35 pm

@Seb G
You point reminds me of something a friend had said when he was talking about his brother who is an attorney that specializes in tech ip. He said that according to his brother, getting through the patent process if fairly easy, what is not so easy to guage is whether or not the patent will stand up in court. I think it would certainly depend on the type of software being written, but it was something I hadn’t considered that I think anyone who thinks they need a software patent should consider before making that investment.

#25 Ezra on 01.08.09 at 3:43 pm

I am a partner in four person consulting firm. The above list covers most of our expenses with the exception of a couple of big ones, rent and accounts receivables.

A one person firm can avoid rent, but if you get any bigger you’re going to have to either turn your home into an office building or rent a cheap basement office. If you do use your home, you have to consider the quality of life cost of losing some space and privacy.

The other thing that many underestimate is the size of the cushion you have to protect against bad debt. We were almost sunk when a big client went bankrupt leaving us with $15k of debt.

#26 JD Conley on 01.08.09 at 3:49 pm

I actually spend a decent amount on domain names now-a-days. Over $200/year if you average it out. And that’s just for the popular variations on a few different domains.

I’d also include logo design and graphic design. These vary wildly but a really good logo can be had for around $500 and offshore graphics people are fairly cheap ($25-35/hr range). These are typically separate from the web designer. Whether you’re shipping desktop tools or a web site, you’ll end up with custom graphics, icons, etc.

#27 Wayne Iyer on 01.08.09 at 3:57 pm

Another expense is business cards $25, which are a great networking tool to use where you live.

As the saying goes if you can make it for 5 years you are set.

#28 Matt Youell on 01.08.09 at 4:37 pm

@fufter – just a note: A freelancer is never billable for anything close to 160 hours a month. At least not if they’re honest. There are too many other things involved in running a business. You can only hire other people to do so much.

Also, someone mentioned office space and that is something I think gets overlooked. Yes, you can work from home, but if there are distractions you won’t get much work done. An office away from home can pay for itself.

#29 Expenses You Don’t Think of When Starting a Business | Software by Rob | micro jmw blog on 01.08.09 at 5:01 pm

[…] Expenses You Don’t Think of When Starting a Business | Software by RobThis is a good article and this guys blog is good! Thankis Rob! […]

#30 R Kopitzke on 01.08.09 at 5:06 pm

I think one thing missing from this discussion is where you are in life and the associated responsibilities that come with that. I have a stay-at-home wife who is raising our 2 kids. I live in a house in a burb in CA. I have roughly $2k per month insurance bills for health, life, disability, auto, house. I have roughly $2500/month mortgage and property taxes (roughly $300K/30yr fixed @ 5.75% ). I need roughly $2000/ month to cover 1 car payment, utilities, groceries, gas, dental, clothes, pre-school, gym, etc. And that is all after taxes. Plus I want to put something away for retirement. Plus any sick time/vacation time isn’t paid for by anyone. That is $6500/month after taxes (Income, FICA, Medicare, SDI)

And guess what? I haven’t even started in on business expenses for most of the thing Rob mentioned above like accountants, lawyers, software, hardware, marketing, servers/hosting etc.

15 yrs ago I was single and could pack everything in the back of my toyota and do whatever whenever. Life is very different now. Yeah I could get by on $2500/month if I could live like I did 15 yrs ago but not anymore.

I guess the point of this is that when you are young and single you can take risks that you won’t be able to later when you are responsible for more than yourself. You need to read posts like this and figure out the real costs before you jump in so you can prepare adequately.

#31 Marc on 01.08.09 at 5:20 pm

Man, I can’t agree more with this article. I’m sick and tired of the adage, “It’s so cheap to start a company nowadays”. I had just written a blog posting about this – and a reader sent me over here. Well done. http://www.mylifestartingup.com/2009/01/state-of-valley.html

#32 Josh of Cubicle Ninjas on 01.08.09 at 7:14 pm

A few really good notes here for entrepreneurs.

Though, I’ve found you don’t really need half of these or more. Anytime anyone tells you something is a necessary expense, I’d recommend questioning it. Mostly this is people not taking the time to do a bit of legwork themselves.

But solid resource to start people thinking…

#33 Pamela Moore on 01.08.09 at 9:01 pm

I can run my biz on around $1000 per month for fixed expenses, but the start-up costs were around $10,000. I’m an independent, so don’t have office lease or employees yet.

If you’re in a specialized profession, you better count continuing education and professional associations. And don’t forget about the costs of networking (coffee and lunch meetings add up).

I quit my day job in order to start my business and it was a big adjustment for my family. Be sure you have a contingency plan for the slow months.

#34 Hamd on 01.08.09 at 9:33 pm

Lpm?

#35 links for 2009-01-08 « memor.ia blog on 01.09.09 at 12:01 am

[…] Expenses You Don’t Think of When Starting a Business | Software by Rob (tags: memori.us startup) […]

#36 keith alperin on 01.09.09 at 12:33 am

Hi Rob, first time reader and caller. Great post. One option that you didn’t mention in either post is to finagle a part time arrangement with your day job or take medium term consulting contracts (on the order of a few months). In the former case, you can keep some cash flowing in while still freeing up time to grow your product business. In the latter, you can take some time between contracts in order to do the same. I’ve tried both and both have worked well for me.

#37 Random Thoughts 01/09/2009 - New Comm Biz - New media strategies for business on 01.09.09 at 12:31 pm

[…] Expenses You Don’t Think of When Starting a Business | Software by Rob […]

#38 Darin Boyd / Braingerous on 01.09.09 at 12:36 pm

I enjoyed the post. I think it’s good to have a grasp of the actual financial requirements of your lifestyle and a sense of scale concerning your expenses.

I agree that on the surface, the $2500 sounds like a lot of money. Many people just don’t have a grasp of what they actually need financially in order to support themselves. I have also noticed a lack of a sense of scale when it comes to money with many people. That’s why you have to be careful when hiring people who may be looking at your Quickbooks file as part of their job. Someone making $20K per year could think you were getting rich when they see more money than their annual salary in the company checking account. Of course they don’t know about Rob’s list and the $3k in Google you’re paying out every month.

#39 Personal IT Experiences » Economic Outlook Making You Think About Starting Your Own Business? on 01.09.09 at 4:06 pm

[…] Expenses You Don’t Think of When Starting a Business | Software by Rob […]

#40 Bill Craun on 01.09.09 at 4:23 pm

@R Kopitzke,

Amen brother.

+1

#41 Will Montgomery on 01.11.09 at 7:16 am

I just thought i’d mention it for completness but I do a large amount of .net development (mainly c# and vb.net but I have done a good share of asp.net) and have a full visual studio 2008 license supplied by my employer. However there is an excellent open source .net ide called sharpdevelop that I use by choice over VS2008. The best thing is that its only a 20mb download instead of the 2 hour install process for vs. Although you will need to install any crystal reports support yourself.

check it out.
http://www.icsharpcode.net/OpenSource/SD/Default.aspx

#42 47 Hats - The MicroISV Digest on 01.12.09 at 9:04 pm

[…] A good post by Rob Walling: Expenses You Don’t Think of When Starting a Business. […]

#43 Interesting Finds: January 13, 2009 « Hank Wallace on 01.13.09 at 9:53 pm

[…] Developer Events – Jan/Feb 2009 Pieter Gheysens – Microsoft Press Book of the month dzone – Expenses You Don’t Think of When Starting a Business Microsoft Downloads – Microsoft .NET Services White Paper (Dec 2008 CTP) Allen Eagle – Adding […]

#44 Steve P on 01.14.09 at 12:19 am

Once again, a great post and a satisfying stream of comments is ruined by trackback spam.

#45 Bloghology Social Network on 01.14.09 at 11:47 am

very true. many startups think that they can start any type of business without planning their finances carefully before hand. i would personally advice on adding an extra 30% on their projected budget to be on the safe side.

#46 My daily readings 01/16/2009 « Strange Kite on 01.16.09 at 7:30 am

[…] Expenses You Don’t Think of When Starting a Business | Software by Rob […]

#47 Vance Lucas on 01.26.09 at 1:22 pm

I just read your article The Software Product Myth and some of the comments, and was thinking the same exact thing as you were probably thinking while reading them, and writing this followup article. Anyone who thinks $2,500/month in just revenues is enough to live on is either:

1) Confusing ‘revenue’ with ‘profit’ or ‘net pay’
2) Not thinking about the self-employment taxes and other expenses you listed (at least 30% of revenue)
3) Still in school, living with their parents
4) Is still single or is married with no kids and a working spouse who is the primary breadwinner

I live in Oklahoma with a stay at home wife and 1 kid. While I could probably manage to “live” on $30k/year, I certainly could not on $21k/year, which is $30k – 30% for expenses. That’s poverty-line level, folks.

#48 Startup Cost « entrepreneur in training on 05.29.09 at 12:27 pm

[…] the developer to complete my project.If he is not able to complete on schedule,who bears the cost. Core Startup Expenses Possibly related posts: (automatically generated)iPhone Costs A Mere $220 To Makefrugal […]

#49 Ted Jardine on 08.11.09 at 1:44 pm

I’ve been successfully self-employed for six years now. There are days I wish I had a good union job, but otherwise, no way.

However, “If you count 40 hrs a work week, thats 160 hours a month.” Billable hours?!? ROTFL. Oh please.

#50 Jeremy on 08.11.09 at 6:13 pm

Many of those expenses are one-time expenses (like incorporating, though some states have annual fees); or expenses you’d likely have anyway but at least now they’re tax deductible (new computer, new software, new printer).

That’s not to miss the point that self-employment requires that your revenue be higher than your previous take-home salary (duh).

Having a job costs money too, the biggest being your commute. Figure $.50/mile, even a 5 mile each way commute (which is pretty short in California), is $5/day = $100/mth. The costs of workplace clothes, work lunches, etc. also add up. I remember reading an article that said that if a mom decides to work outside the home, something like the first $25,000 of her salary goes to taxes, commute, clothes, daycare, and dining out before she puts any money towards family expenses.

That’s probably on the high end, but the point is you lose some expenses working from home.

As far as employer’s portion of self-employment tax….your employer might write the check, but trust me, YOU are paying for it in the form of reduced salary.

If you really are so valuable to the company, you ought to be able to make more on your own assuming you can handle the business aspect. On the other hand, if you happen to be some of the deadwood at the company, then when you leave, you’ll soon discover how unprofitable you really were! Better hope that you’ve been underappreciated rather than overappreciated at work.

#51 Dave @ FixmyPCHelp on 02.17.10 at 1:20 am

Nice post.

How about professional insurance, for the industry you’re in? Often the same as Liability but sometimes different.

I’ve also found a hidden costs of aesthetic and environmental arrangment. In other words, I used to focus on functionality in my office, but spending more and more time there, I find it necessary (for my own sanity) to spruce up the desk, ie. keep it organized and clean, and make the office environment mentally soothing.