Key Takeaways
- First-year expenses usually fall into operations, technology, compliance, and visibility
- Ongoing software and automation costs often outweigh one-time startup purchases
- Most first-year funding comes from owner capital or revenue-based options
- Businesses with organized, digital expense tracking avoid many tax and cash-flow issues
When you’re just starting out in the first year of your Rockville, MD business, it’s difficult to have an accurate estimate of how much it costs to keep your business running.
I saw a poll of 700 small-business owners, which found that more than half lowballed what they’d have to spend during their first year in business.
That’s a lot of miscalculation — and a lot of potential for having to shut the doors before you ever really get off the ground.
So, I want to give you some pointers about what to expect to spend in year one. So you know from the get-go how to run your business profitably and sustainably.
What are typical business expenses in the first year?
Business owners drop from $35,000 to $100,000 in the first year, depending on whether their company is completely online or completely brick-and-mortar.
All that roughly breaks down to:
- Inventory (30%)
- Equipment (21%)
- Location (15%)
- Taxes (12%)
- Utilities (7%)
- Payroll (6%)
Of course, how much you spend in each category can vary. A service-based business with no inventory may spend very little upfront but carry higher monthly overhead. A product-based business may spend heavily before revenue begins. Both scenarios are normal. The risk comes from not understanding which category dominates your model.
Where does that money come from? Typically, investors (such as venture capitalists and angel investors), crowdfunding, and borrowing from family or friends.
Unfortunately, commercial business loans can be hard to come by for brand-new companies with no proof of future revenue. Many owners end up turning to their own money: their everyday savings, nest eggs, alternative lenders (such as peer-to-peer lending, with its risks), credit cards, or personal loans.
What are typical business expenses that surprise new business owners?
The new business owners that I’ve worked with usually struggle because of small, recurring costs that don’t show up on a standard business plan but hit the bank account every single month.
For instance…
- If you sell $1,000 worth of product via credit card, you didn’t actually make $1,000. Merchant processing fees (typically 2.9% + $0.30 per hit) and bank transaction limits mean you’re losing 3–5% of your top-line revenue before you even pay your bills.
- In year one, something will likely break. Maybe a laptop screen, a printer, or a specialized tool. Without a “repairs and maintenance” line item, these unexpected hits can derail your month’s profit.
- Every year, you’ll face a wave of renewal fees to keep your doors open, ranging from State Annual Reports and Registered Agent fees for corporations to local business licenses and DBA renewals for solopreneurs.
So, here’s my golden rule for first-year business owners: Always add a 10% buffer to your monthly operating budget. It’s the difference between a stressful month and an easy one.
What are the most common financial mistakes in the first year of owning a business?
A huge mistake I commonly see is co-mingling funds. When you pay for a business lunch with your personal debit card “just this once,” or use your business account for a quick grocery run, you are effectively poking holes in the corporate veil that protects your personal assets.
If you can’t prove where the business ends and you begin, neither can the courts nor the IRS.
There’s also a massive temptation to look like a successful business before you actually are one. E.g., the $3,000 custom website, the fancy office chairs, and the premium subscription tier for software you haven’t learned how to use yet.
In year one, your aim is to find a repeatable way to make money. If an expense doesn’t directly help you find, close, or fulfill a customer, it’s probably a distraction.
You can also be profitable on paper and still go broke. If you finish a $10,000 project in month three, but the client doesn’t pay until month six, you still have to pay your bills in months four and five.
Mistaking booked revenue for available cash is why many promising small businesses hit a wall. You manage a business by your bank balance and the speed at which your cash is disappearing… not just your P&L statement.
How should new business owners track expenses?
Expense tracking is most effective when it’s automated and consistent. So, find expense tracking tools that:
– Capture receipts digitally
– Sync transactions directly from bank and card accounts
– Store documents securely in the cloud
– Categorize expenses automatically for reporting and tax purposes
And here’s why diligent expense tracking is so crucial in the first year of your business: Expenses not recorded close to real time are usually miscategorized or forgotten (or just missed entirely) by the time tax planning decisions are being made.
First-year expenses frequently determine whether your business shows a loss, break-even result, or small profit. And those outcomes affect how deductions are treated, whether losses can offset other income, and how future tax planning is structured.
Final thoughts
Navigating the first twelve months of business is an exhilarating challenge. But the math of entrepreneurship is much more complex than just revenue – expenses.
Whether you’re still in the planning phase or you’re six months in and feeling the paper cuts of recurring costs, I’m here to help you strengthen your financial foundation.
Let’s identify your potential financial leaks and make sure your business is structured to be healthy and profitable in future years.
FAQs
“What are typical business expenses I should plan for in year one?”
Beyond inventory and rent, you must budget for operational friction. This includes software subscriptions (accounting, CRM), merchant processing fees (around 3% per sale), and professional services like bookkeeping. Expect to spend anywhere from $35k to $100k, depending on whether you are a digital or brick-and-mortar brand.
“How can I prepare for unexpected business expenses?”
From a broken laptop to an unexpected state filing fee or a price hike from a supplier, small surprises can derail your cash flow. A 10% buffer ensures these paper cut expenses don’t turn into a financial crisis that forces you to close your doors.
“Can I use my personal credit card for business expenses to earn points?”
You can, but it’s a legal risk. By mixing funds (co-mingling), you could lose your personal liability protection. It also makes your bookkeeping more expensive to fix at year-end. The better move is to get a dedicated business card. You’ll still get the points, but your legal protection and paper trail stay intact.
“What is the best way to track business expenses?”
Automation is your best friend. Use a tool that syncs directly with your bank account and allows you to snap photos of receipts. Real-time tracking prevents lost deductions and ensures you aren’t stressed during tax season trying to remember what a specific charge was from six months ago.
“Should I categorize my business expenses?”
Yes – and not just for taxes. Categorization shows you exactly where your profit leaks are, such as ballooning software costs or low-ROI marketing. Without categories, you’re just looking at a shrinking bank balance with no direction on where to cut costs. Plus, the IRS requires specific categories for deductions, so sorting them now saves you from a massive (and expensive) accounting cleanup later.
“Do I really need a bookkeeper if I use software like QuickBooks?”
Software is a tool, not a strategy. It’s very easy to automate yourself into a mess by miscategorizing transactions. A bookkeeper ensures your data is accurate so your tax planning is based on reality, not errors.