10 Hidden Costs of Running a Small Business

10 Hidden Costs of Running A Small Business

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.

What Makes A Successful SMB Owner

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.


Business Cost Calculator

Click To Visit the WSJ Startup Cost Calculator

Tool Tip:

Use the Small Businesses Startup Cost Calculator


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?

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Brian Sutter

Brian Sutter

Director of Marketing at Wasp Barcode
Brian Sutter is the Director of Marketing at Wasp, responsible for the development and execution of the company’s marketing strategy. His role encompasses brand management, direct and channel marketing, public relations, advertising, and social media. He also writes and speaks on topics related to helping small business owners grow their business and improve operational efficiency.
Brian Sutter
Brian Sutter

Comments

  1. And you call these costs hidden. Why?
    If you don’t take these basic costs into consideration before opening your business you don’t have business being in business.

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    Rating: 3.8/5 (8 votes cast)
  2. Great article

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    Rating: 3.5/5 (2 votes cast)
  3. Gerardo Barria says:

    very helpful tips for small businessman ….

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    Rating: 5.0/5 (1 vote cast)
  4. Great post Brian, starting a small business seems like a lot to take on considering some of these costs.

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    Rating: 3.5/5 (2 votes cast)
    • It is a lot, but if you know what you’re getting into upfront you can plan for it and still be successful.

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  5. Not so much hidden Brian, sometimes I think some these are just overlooked. Ex. you know you’re going to have employees and all the expenses that go w/ – but if you ignore things like turnover, the costs of recruiting and retraining can add up in a hurry. As to office set-up and workflows, small businesses need to look at how they work in order to see the best way. Ex. are paper reports and files really necessary? Or would investing in Cloud services actually pay off both in terms of long-term equipment and supply savings, as well as increased returns via more productive employees? Something to consider.

    Much of these others certainly creep up on a small biz manager – and nothing more than time. It’s often a case, much like technology, the ‘savings’ of going cheap or DIY won’t add up in the long run vs. outsourcing, delegating those tasks so that everyone gets the most from their valuable time. FWIW.

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    • Davina, You are right, “overlooked” is a more accurate word than “hidden”. Cloud services can definitely help small businesses save money. You may be interested in the article my colleague wrote on that topic— http://bit.ly/ZCveJX.

      Time is a big overlooked factor, and you make a good point about DIYing. It doesn’t always result in savings if you consider the time (money) spent trying to learn a task you aren’t already trained in.

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  6. Brian – Not all of these expenses are hidden. Now there may be ways in which you can reduce these expenses. I wrote an article on how to systematically reduce the costs. it addresses many of the expenses you have mentioned here. Would love to hear your view on that article – http://www.smallbizviewpoints.com/2011/08/17/a-systematic-approach-to-cost-reduction-for-small-business-owners/

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    Rating: 3.0/5 (2 votes cast)
    • Harry, I think you mention some fine strategies in your article – thanks for sharing. Ultimately we wanted to provide readers a laundry list of things to be conscious of as its easier than ever for nominal, “hidden” expenses to add up to rather important, big expenses. Being aware of what some refer to as your “latte” factor is the first step to financial self analysis and reduction of wasteful spending.

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  7. Nice post! Thanks for sharing!

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  8. Very helpful! An excellent way to save on
    office space rent is to have a virtual office. Particularly if you work
    from home or spend much of your time on the road, a firm such as Cloud Virtual
    Offices can provide everything from a professional address and phone service to
    meeting rooms when you have important client meetings.

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  9. Deborah Osgood says:

    This article is quite helpful as the categories listed can be easily underestimated. Depending up on the size of your business, there is a cloud-based app for improving expense management offered by a company called ExpenseWatch. It not only offers detailed categories to gain a better picture on where and what you’re spending money on, but also includes features for logging actual expenses and receipts when you’re traveling and viewing an update in real time of costs.
    Your tip on networking to grow a small business is also EXCELLENT! Many business owners put this off. However, the old adage about who you know versus what you know applies well to growing a business. A key word search that includes your state followed by the words “trade associations” will return a nonprofit, public service directory of small business specific options by industry.
    Thanks for the article!

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  10. अतुल गुप्ता says:

    This article really is very helpful & necessory to increase your small own business

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    Rating: 0.0/5 (0 votes cast)
  11. Ebola

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  12. Hidden costs what do it mean? I don’t hunderstand it yet.

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  13. Don’t know if this was said already, but you must not forget advertising costs. As well as uniforms if you require your staff to wear them.

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  14. Thank you for the mention! Your link provides some great information.

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    Rating: 0.0/5 (0 votes cast)

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