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Entrepreneurs underestimate start-up admin costs

The average small business spends more than £22,000 on administration in its first year, according to new research; but many new entrepreneurs underestimate these costs.

A new study from online business service Geniac reveals the average start-up invests £22,756 in its first year to cover essential business administration costs, including accountancy, company formation, HR and legal services. Yet those thinking of starting a business underestimate these expenses by £2,525 on average.

The largest business administration outlay is associated with company formation, including company set-up, drafting articles of association, board minutes and shareholdings. This costs an average of £6,378 or 28% of the total amount.

However, the cost that would-be entrepreneurs are most likely to underestimate is accountancy fees; the research found that on average, respondents had budgeted £1,723 too little for accountancy costs in their first year.

Geniac's study shows that 64% of small business owners say they have been hit with unexpected costs, the negative consequences of which include profit losses (23%); being forced to readjust growth targets (21%); and having to let staff go in order to free up funds (7%).

Mike Galvin, Co-founder of Geniac, said: 

"It's concerning that start-ups and small businesses are not only losing profits and staff but are readjusting growth plans because they've underestimated the cost of starting up. It's even more worrying that they are over-paying in nearly every area of business administration - in nearly every part of the country."

Start-up administration costs vary significantly across the country, according to the research. The average London business spends £30,211 on essential business administration in the first year while businesses in Wales are able to run at less than a third of the cost at £8,096.

After London, the most expensive places to set up a company are the North East, the North West, Scotland and the South West.

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