4 Costs and Expenses That Affect Your Startup’s Success
Beyond simply knowing how much capital your startup will require, understanding the different expenses can affect your entire strategy.
As a digital venture studio, most of the advice we present on this blog is related to mobile app development, product strategy, and identifying opportunities in your industry. However, a validated idea and a well executed solution aren’t the only keys to startup success.
Understanding the costs and accounting that go into launching a startup can make or break your venture. Beyond simply knowing how much capital your startup will require, understanding the different expenses can affect your entire strategy.
In fact, understanding the difference between sunk costs and relevant costs is what separates a first-time entrepreneur from one with several startups under their belt. Understanding the difference, and learning how to build a startup with minimal sunk costs, can greatly change growth goals and when your startup will see a return on investment.
With this in mind, here are the 5 costs and expenses associated with launching a startup:
Sunk costs refers to funds that are spent and can’t be recovered. In startup terms, everything spent before your product launches should be considered a sunk cost.
The mistake most entrepreneurs make is spending too much money developing their initial product before launching. This creates a massive sunk cost which can be difficult to recover.
One way to avoid sunk costs is to build a minimum viable product to start generating revenue and measuring the market for your product as soon as possible.
The opposite of sunk costs are relevant costs, which are future costs the business will incur if specific decisions are made. If your startup continues to operate, all future operating costs are considered relevant costs because choosing to close the venture will end these costs. The money already invested in developing your digital venture which can’t be recovered even if you shut down your business today are considered sunk costs.
If you take our advice in the previous section and launch your product as soon as possible, any future features or improvements can now be considered relevant costs instead of sunk costs. This gives you much more freedom to make decisions without needing to consider how to recover massive sunk costs.
Cost of Goods Sold
COGS, Cost of Services, or Cost of Revenue, refers to the direct costs associated with producing your product or service. For SaaS businesses, this line item can get somewhat confusing. It is also the most important cost when considering a company’s valuation.
In general, COGS includes hosting costs, third-party software, and employee costs for engineering, customer support, and anything else required to deliver your product or service.
All other costs associated with the day-to-day operation of your startup, which don’t directly contribute to the production of your product, are considered operating expenses (OPEX). These include selling, general, and administrative expenses (SG&A). OPEX includes rent, utilities, taxes, travel, and all other employee expenses such as sales and administration.
One important item to discuss in relation to operating expenses is your utilization rate. When your engineers are working on the product (or in terms of digital agencies, when your engineers are doing billable work) the employee expenses are considered COGS. When they aren’t working on the product or don’t have any billable work to do, their salaries become OPEX and are completely wasted.
One of the most critical takeaways from this blog should be to improve your startup’s utilization rate to avoid overhead costs as much as possible. NineTwoThree works as a digital venture studio because when our engineers aren’t working on client projects, they use any available time to work on our internally funded ventures. This completely avoids any overhead costs from our engineers.
We talk more about how digital venture studios help improve utilization rates in another blog. Hopefully this blog serves as a starting point to give you a better understanding of the costs associated with building a startup and how they can affect your success.