How much does it cost to start a software company – Here’s What You Need to Know

Starting and running a new business requires proper planning and finances. For the business to run efficiently, proper budgeting must ensure a decent cash flow level and sustainable operations.

For a software startup, the same rules apply. Enough capital ensures the business expenses are met. Although experts recommend enough capital for at least six months, it is not cast in stone, and every business journey is different.

For a software business, the founder’s skills and background come in handy. The more skilled and able they are to perform some of the tasks, for example, coding, the better and cheaper it gets for the business.

Expenditures associated with running a software company

how much does it cost to start a software company
how much does it cost to start a software company
  • The following are the expenditures you expect to encounter while running a software startup business.
  • Equipment- while setting up a software business, certain equipment like computers are required for smooth operations.
  • Furniture -furniture is a vital requirement for any business. You require to set up desks and furnish the business premises.
  • Supplies- for any business o run successfully, it should be in a position to
  • Signage- ensure to budget for signage fees while starting up a software business.
  • Legal and professional fees- to have your business legally compliant, you require to involve legal professionals, which comes at a cost.
  • Research and development- research is an important part of running any successful business. It helps grow and develop the business.
  • Rent- starting up a business with a brick and mortar means paying rent for the premise.
  • Utilities- every business has utilities that need to be taken care of, which means an extra cost on the business.
  • Health insurance-health insurance is essential for any business with employees
  • Taxes- paying taxes is compulsory for any legal business.
  • Internet access-internet in the software business is inevitable. Connecting to stable internet comes at a monthly charge.
  • Salaries- a good team is an asset to the business. Hiring the best employees at your company means paying them good salaries, and offering the best working conditions is key to keep them around for long.
  • Contractor wages- running a business involves contracting different service providers for the well-being of the business.
  • Miscellaneous overheads are always important to budget for any miscellaneous expenses that could arise without your knowledge.

Read: Founder vs co founder

How to start a software business

There is more to running a software business than registering it with the state. The following steps will ensure the business is legally compliant and well planned out.

Plan Your Business

For a business to succeed, careful planning is key. Critically analyzing your idea and creating a game plan is essential before committing any huge amounts of money to it. You should ensure the following are in order at the bare minimum;

a. A business name

When choosing a business name for your software company, it is advisable to find one that resonates with your customers and follows your states naming rules.

b. Business location

The kind of business you are setting up informs the location, licensing, and permits to apply for. With a software business, you may require to set up a brick and mortar establishment or work from home, depending on your business level.

c. Conducting market research

Conducting thorough market research is a crucial step before setting up for operations. It can involve doing search engine optimization research, holding focus groups, or conducting surveys. Market research allows you to know your competitors, which helps you know how to position yourself in the industry and crafting an effective business plan.

d. Write your business plan.

A well-written business plan could be the defining factor to the future of your business. While it helps you get organized while starting your business, a well-crafted business plan will help obtain business funds and help the business reach important milestones.

You may like, What should startup know before seeking funding?

Below are some of the components of a good business plan;

  • Product development; establish the problem your business is set to solve and what will set your services or products apart from that of your competition.
  • Sales and marketing- have a clear plan of who your potential customers are, how to get their attention and convert them into regular customers.
  • Partnerships and people; your business cannot succeed on its own. You need to establish who you need to hire for different roles in the business as well as what professional partnerships to have to succeed.
  • Finances; financial planning is crucial in the success of a business. Where to get funding for the business, how much sales or clients you need to break even are factors that need to be considered when crafting a business plan.

Getting funds

It is an open secret that funding is required when starting a business. Before securing the money, you need to cover the startup cost; however, you need to calculate the business cost.

By so doing, you can establish the best funding source for your software business. Upon receiving funding, be smart with your spending by creating a detailed financial plan.

Explore funding options

There are several funding options to explore for your business. They include;

  1. Friends and family– you can finance your business through friends and family loans. However, when mixing the two with business, it is important to have a written agreement and repayment plan to help navigate any future issues that may arise.
  2. Bootstrapping– the bootstrapping approach for business funding means that you solely provide the capital for your business through your savings or current income. Once the business is up and running, the profits are reinvested in the business for it to grow.
  3. Business grants-the small business grants approach to business funding involves getting funds you don’t have to repay. You can obtain Small business grants by completing the application process with your sponsor.
  4. Small business loans– this approach to funding typically involves applying for a loan through a lending institution or bank. The funds help cover startup costs, but the loans are subject to repayment, unlike small business grants.

You may like, Types of Funding for Startups

Choose a Business Structure

Registering your company as a legal entity, for example, a corporation or sole proprietorship, is advantageous. It increases the business’s credibility and protects you from personal liability in case the business is sued.

Form Your Business

After choosing your business structure, the next step should be forming the business. The steps to form your business include;

  • Naming your business
  • Choose a registered agent who could be a business entity or individual that accepts legal documents and tax on your business behalf.
  • Get an employer identification number assigned by the internal revenue service for tax purposes by identifying your business.
  • Filing formation documents

Each business structure has its requirements in addition to the ones above, unique to itself.

Read: How Long Before Successful Tech Startups Start Making Money?

External factors that affect the software industry

Several factors affect the operations and performance of the software industry. They include;

  1. Private investment in software and computers; the software industry is positively affected when the demand for computers and software increases.
  2. Mobile internet connections- When mobile internet connections increase, the need for security software also soots. The increase is thanks to the mobile devices being vulnerable to viruses hence the need for security solutions hence increasing the industry revenue.
  3. Video games demands-an increase in the sales of video games benefits the software industry.
  4. Corporate profit companies tend to upgrade their IT systems when their profits increase. This benefits the software industry as it involves the purchase of new software.
  5. Government investment and consumption- government, investing, and spending boost the software industry’s growth and performance.
  6. Increase in PC owners- the percentage of households with at least one PC is increasing. That increase in PC ownership is a win for the software industry as the demand for software also increases.
  7. Disposable income- An increase in per capita disposable income gives high chances of people purchasing new software for entertainment or personal use hence boosting the software industry.

You may like, Why do people leave big tech companies for startups?

Tips to a successful software startup business

cost to start a software company
cost to start a software company
  • Development

For a software business, development should be the number one priority. Ensure that most of your resources, both human and financial, focus on developing a great end product. Without a good product, the whole establishment will be pointless.

  • Cost-effectiveness

For any business startup, scaling down on expenditure is the way to go. If you can code from your garage, it becomes a lot cheaper compared to getting a brick-and-mortar establishment for your small business. Doing big-ticket items yourself with the bare minimum is the way to go for a software startup.

  • Marketing and promotion

Marketing software products can be difficult and expensive. For a startup, the luxury of affording huge promotions is not something you may enjoy.

There are other cost-effective options, however, for example, having your software featured in influential blogs. Word of mouth and PR activities by the founder also go a long way in boosting sales.

There are also tools like AdWords, social media, and SEO to promote the business while being cost-effective. Freelancers with proven track records are also another option for your startup to be out there while saving it a lot of money.

  • Operational cost

Considering operational cost and management while starting up is an important factor to be considered. Even without having huge bills to pay for your business, it is also important to factor in expenses to incur while going to present to a venture capitalist or running any company-related errands.

You may like, How tech startups use investments?

The cost of setting up a software startup

Software startup costs, just like app development costs, are relative. The margins can range from a few thousand to the six-figure range.

No actual figure can quote exactly how much you could spend on a software startup as it all depends on variables that contribute to your specific company and products.

Despite being relative, the cost of starting up a software business should look like;

  • Phase 1– until you have an MVP. Development takes up 100% of your budget.
  • Phase 2– here, development takes about 60% of your budget, while marketing takes around 30%. Operations of the software startup will demand about 10% of your budget.
  • Phase 3-once development is complete, and the product is released; marketing the product will demand about 60% of your budget, while operations and fixing bugs will take up about 20% each.