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As a small business owner, you can easily anticipate many standard expenses like payroll for employees to rent for office space. Yet you're likely to encounter many unexpected costs during the startup process or on a recurring basis.
These unplanned costs can add up quickly, significantly impacting profitability. In this article, we'll walk through the hidden costs of running a business so you can make a plan to cover them and keep your business running smoothly.
When you're starting a business, costs often include securing a physical space, publishing a website, and purchasing inventory. Let's look at some additional costs you may be overlooking.
Whether you run your company from a dedicated space or you work from home, you may need a permit or a license to do business. For example:
To confirm the requirements and total costs for your business, check with your state and local government. Many offer automated systems that list the licenses and permits you need based on your business type.
When you operate as a sole proprietor, you may never need to file paperwork to make your business official. But when you form a business entity like a limited liability company (LLC) or an S corporation, you'll need to register your company.
The process and cost varies from state to state. In some cases, you can simply file articles of organization with your state and pay a fee, which averages $200.
In other cases, you may also have to pay for a registered agent to receive legal documents on behalf of your business. A registered agent can cost an additional $100 to $200 and becomes a recurring annual fee.
You might not anticipate costly legal issues when you start your business. To avoid these issues down the road, protect your company, your team, and your intellectual property through legal contracts and agreements.
Custom service contracts, employment contracts, partnership agreements, and other standard legal documents can cost anywhere from $500 to $2,500 each. Templates that you can modify yourself tend to cost much less but may provide limited protection.
"Every situation is different which is why a custom contract is the safest way to go," advises attorney David Hood. "The money a person spends on contract forms that turn out to be unenforceable is a total waste of funds. Add to that wasted money the money your business loses after a judge declares your contract to be unenforceable."
The type of company you start and the kind of clients you serve determine which insurance your business needs. For example:
The average cost of small business insurance ranges from $800 to $1,800 per policy, and many require upfront payments when you start your business. Bundling insurance may help lower the cost.
Even after you hit the one-year mark and you've been in business for a while, you're likely to run into a few surprises. Let's look at some of the most common overlooked costs in small businesses.
As a business owner, you already know to budget for income taxes. But you can't wait until the end of the tax year to make those payments. Instead, you have to pay estimated taxes, which requires planning ahead and managing your cash flow effectively.
Your business type and employer status determines any additional taxes you owe. For example:
Since taxes can get complicated quickly, you might hire an accountant to make sure you get them right. You'll need to budget at least $1,000 per year for this added service.
Accepting credit cards gives your business a quick and convenient way to accept customer payments. But if you don't budget for the processing fees, you could end up earning much less than you expected.
Card networks like Visa and Mastercard charge average merchant fees that average about 2% of the total purchase. On top of that, payment processing companies generally charge between 2.5% and 3% per transaction.
As your business grows, you may need to bring on new employees. However, it's important to know that the cost of an average employee goes way beyond their annual salary.
Edie Goldberg, founder of talent management company E.L. Goldberg & Associates, explains that hiring a new employee can cost three or four times their annual salary. "Of those costs, I would say 30% to 40% are hard costs, and the other 60% are soft costs."
When hiring employees, make sure to account for:
No matter what type of business you start, you'll need to collect payment from customers or clients. Ideally, you receive these payments on time like clockwork.
But in reality, you're likely to encounter at least a few delayed payments. In some cases, these delays can cause serious cash flow issues, making it difficult to pay employees, vendors, and suppliers. As a result, you may have to borrow funds quickly or lose your best vendors and suppliers.
To account for delayed payments, make sure you have enough cash reserves for three to six months of operating expenses. Consider applying for a business loan or grant to get the funding you need to keep your business running smoothly.
Whether you're a first-time owner or a seasoned entrepreneur, you'll face occasional unanticipated expenses. But the more you know about potential costs and make a plan to cover them, the easier time you'll have managing cash flow and building a profitable business.
As you prepare to start a business or enter the next stage of growth, evaluate your current budget. Reach out to an advisor for professional guidance and keep your business on a path to sustainable growth.