5 Unexpected Costs of Running a Small Business
So you’ve been in business for a while and are ready to embark on the journey to take steps and scale your business. You focus all your energy on growing your book of business and keeping up with customer demands. After a few months, you stop to catch your breath, look at your balance sheet, and think: “Where did all the money go?”
If this sounds familiar, don’t worry. You are facing a challenge that every entrepreneur faces during their growth stage: increase or stabilize profits after significant time and energy were spent scaling the business with costs around every corner. Typical small business overhead expenses include inventory, marketing, and other costs of doing business that were originally forecasted. But now the entrepreneur is in the growth or execution phase to scale, there are costs often not anticipated —these are the ones that take you by surprise and can impact your cash position.
Here are 5 unexpected costs of running a small business and some tips on building your pro-forma to consider all your business expenses—especially ones you might otherwise miss.
1. Equipment and maintenance
Whether you own a small bait shop in a tiny beach town or a dental office in Manhattan, chances are you need equipment. Whatever it takes to get the job done, know how much your equipment and tools cost and the estimated growth and return from the investment.
As your business grows, account for the additional equipment you will buy. As profits roll in, you might want to upgrade equipment to expand or create greater operational efficiencies. Or, you could add products or services to your offerings, requiring more equipment.
Remember to build in equipment maintenance costs as it ages in your return calculations.
2. Professional fees
Few people are specialists in every aspect of running a business, and those who try to be often find their way back to industry experts and services.
Do you understand how to build and track financial statements? Even if you do, it would be good to have an accountant nearby to guide you through your growth. Other professional services you might eventually consider include Marketing or Public Relations services, Recruiting/Headhunting services if you don’t have an HR department, and more. Professional fees can get expensive, but they can be a worthy investment compared to doing it yourself and making the wrong decision in the near-term and spending significantly more to fix it in the long-term.
You might not be a tax professional. But, being your own boss means handling your taxes. If your business is not incorporated and makes over $400 annually, you must pay self-employment tax. This tax is made up of Social Security and Medicare taxes, and adds up to 15.3% of your income.
As a small business owner, you will pay federal income tax, as well as state and local income taxes (if applicable). Depending on the kind of business you operate, you could have more tax liabilities. Stay up-to-date with tax rates and deadlines for your small business and make sure to set aside cash for future tax payments to avoid putting yourself in a bind.
The more customers demand from your business, the more your business demands from you. At some point, you might need extra hands helping you with daily operations. However, a passionate workforce can be costly.
There are many hidden costs of running a business when you add payroll to the mix. Employee expenses include taxes, training costs, and benefits, in addition to regular wages. If you aren’t trained on the hiring process steps, you could end up losing a lot of time and money before you even add an employee to your payroll.
Whether you consider it a perk or a burden, there is always something to do as a small business owner. Your time is valuable. But, spending too much time on tasks that don’t generate revenue is a dangerous hidden cost of running a business. Additionally, not retaining the appropriate talent (internal or external) to assist with key decisions out of your expertise can also be costly. Make a comprehensive list of all the things you need to do and prioritize the task list to maximize return.
You may be tempted to devote time to easier tasks or internal management issues. But remember, as you get your small business up and running, it is important that your customers feel they are getting your attention. Make sure you are blocking off time each day to touch base with as many clients or customers as possible. They are ultimately why you exist.
These are only a few unexpected expenses your small business could incur. It is important when building a budget and managing your finances that you anticipate as many costs as possible – you never want to be surprised when you look at your balance sheet. If you are a small business owner, sound off on what costs surprised you the most when you were starting your business.