If the thought of starting your own business and being your own boss is something you've always wanted to do, it's wise to first understand expenses. Underestimating the costs you’ll absorb is a key contributor to business failure, so its important to plan for and understand exactly what it will take to be successful. Our short list of hidden business costs can help you get started. What other hidden costs should entrepreneurs be aware of?
Many individuals with a dream and an entrepreneurial spirit set out to start their own business. That dream can quickly turn into a nightmare when it comes to keeping that dream alive and the business thriving. One of the first steps to starting out on your own is to understand expenses: According to a report by the Global Entrepreneurship Monitor, more than half of all businesses that shut their doors did so because of a lack of profitability. That issue goes beyond a weak revenue stream. Hidden expenses can eat into your profits until you’re in the red.
According to a study by Barlow Research, the massive Great Recession has cost U.S. small businesses upwards of $2 trillion. “That works out to an average loss of $253,000 for each of the eight million U.S. businesses with sales between $100,000 and $10 million,” the Barlow study said. Only 35% indicated their financial condition was improving, down from 46% in the second quarter, the study added.
According to a study by Barlow Research, the massive Great Recession has cost U.S. small businesses upwards of $2 trillion.
While issues covering expenses and making payroll are far from rookie mistakes, newcomers to small business ownership should plan for what it will take to be successful including identifying the often overlooked or unspoken costs of running a company. The Wall Street Journal has a free calculator that helps estimate the costs of starting a new business. Use the calculator and this list to estimate top hidden business costs. These are great tools to help you get started:
Industry association fees – It helps to be connected, especially as a new small business. A great way to build your network among peers is to join professional associations relevant to your industry. Be selective, annual costs can be hundreds of dollars. Select one or two of the top associations and get the most out of your money. Use a service like MeetUp or contact your local chamber of commerce to get started.
Licenses or permit fees – There are several factors to consider here: Do you need a license or permit to do business? What federal, state or local regulations will you have to abide by? Will you do business across multiple jurisdictions, online or otherwise? Once you’ve figured out permits you need, what will they cost and how often will they need to be renewed? Will you be required to invest in CEUs annually? Factor these expenses into your annual budget.
Credit card fees – Can customers buy your product or service with a credit card? Expect to pay around 3% of total charges in credit card fees, if so. Research can help you determine credit cards that charge the lowest fees, but ultimately you want to make purchasing simple for customers. Find the right balance between fees and customer satisfaction. You can also fall into debt by using a credit card as a buyer yourself. Read about business credit card considerations here.
Employees – Salaries, sick leave, vacation and health insurance add significant expenses to your budget. Keep in mind that health insurance is most expensive for companies with fewer than 10 employees, so budgeting for benefits is important to stay out of the red.
Failing to invest properly in your employees, providing a living wage, a clean environment, office perks and other benefits can lead to high employee turnover. Furthermore, it costs about one-fifth of a worker’s salary to replace that person when they leave. In some industries that cost is even higher. Losing employees can add up significantly over time.
Related Article: Reasons Small Businesses Fail
Office space – Paying hundreds or thousands of dollars a month to rent a space for your small business can hit your bottom line in a big way. Before deciding where to set up shop, ask other local business owners about their experiences and best advice for local renting.
Utilities – After renting your office space, don’t forget to budget for utilities: electric, water, gas, Internet and phone. Most services will estimate the average monthly cost for easier financial planning. Furthermore, conducting an energy audit can help you identify and make cost-reducing improvements around the office.
Tip: According to Cornell University, keeping the thermostat at 77°F will improve office productivity, plus you’ll save on electricity during those summer months.
Purchasing office equipment – The tools you need for your small business to create a product or run a service should be known to you, but smaller equipment costs can be forgotten in the mix. Remember to include basic office equipment in your budget, items like computers, copier, paper, scanner, desks and chairs. Determine the needs of your small business and compare prices until you find the best deal. Some items, like cubicles and desks, can be purchased second-hand for a significant savings. You can easily save up to $200,00 a year on unnecessary expenses.
Repairs and maintenance – You budgeted for company smartphones, office rent, the electric bill and a cutting-edge copier, but what happens if everything breaks? Reserve a line in your budget for emergency expenses.
Insurance Costs– This will be of the most important “checks” your business will write every month. Every business needs insurance such as employer’s liability for employees. Other policies, such as public liability, will be needed to cover your business from the risk of being sued by a member of the public. It’s also important to protect your business if a client makes a claim against you for negligence. Exploring insurance for property and to protect against illness and injury is important too.
A good rule of thumb to stay out of the red is to budget 20% of revenue to cover expenses you simply don’t think about.
Professional fee (legal and accounting)-a lot of people don’t budget for legal and accounting fees. 46% of small businesses reported they do not work with an accountant. You will need to negotiate with your accountant and attorney to keep fees within your budget (some attorneys can charge upwards of $125 an hour). Having these professionals working for you could not only save you time but a lot of headache. These professionals can take care of tasks that are difficult or too time consuming for small business owners to manage.
Another common reason for small business failure is overconfidence. The costs and responsibilities of running a business can often sneak up on you. Don’t start a business endeavor until you have covered all the bases, and that includes preparing for extra costs you didn’t plan for. A good rule of thumb to stay out of the red is to budget 20% of revenue to cover expenses you simply don’t think about.
What other hidden cost have you found in starting or running a small business?