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indirect costs for small businesses

Common Indirect Costs for Small Businesses

When you’re starting a small business, you probably have a good idea of what your “direct” costs will be. A bakery needs a baker, a kitchen and baking supplies such as flour and eggs.

What you might not have as tight a grasp on are the indirect costs a small business must bear.

Despite the term “indirect,” these expenses are very much necessary for the operation of successful, smoothly run business. And while some are obvious, others aren’t.

The more you know, the better you’ll be able to accurately budget. Not to mention, certain direct and indirect costs can be deducted on your taxes, so understanding what qualifies as each could lead to significant tax savings.

If you’re starting up a small business, read on as we discuss some of the most important indirect costs you’re likely to face.

Indirect Costs You Should Know

Employee salaries

This first indirect cost is a little counterintuitive. While employees are the lifeblood of any company, only some salaries are considered “direct.”

If a worker directly contributes to the production of a good or offering of a service, that’s direct labor, and thus a direct cost. But salaries for any workers that are administrative or otherwise not directly connected to the business’s production are considered indirect.

Professional expenses

Similarly, a number of services you might contract out for would be considered indirect costs. For instance, if you hire people to perform accounting, legal, investment banking or general consulting services, those would be considered indirect.

Rent

The pandemic proved that some businesses can be run entirely from the confines of home. But as a general rule, most businesses need some sort of physical space, be it an office, store or warehouse, and rent is considered an indirect cost.

Utilities

Along the same vein, most businesses need more than just a building. They need basic utilities and services such as electricity, water, phone lines and internet.

Office supplies and expenses

Like our bakery example above, supplies such as flour and eggs would be considered direct costs, as they directly contribute to the goods the company is producing.

Some supplies aren’t quite as essential, however — though you certainly wouldn’t want to be without them.

Paper, pens and signage are examples of supplies that are considered indirect costs. Higher-ticket examples include cash registers, computers printing stations.

When You’re Building a Business, The Fewer Surprises, The Better

You can’t look around every possible corner when you’re starting a new company. But in general, the more things you can anticipate, the better off you’ll be. That’s especially the case with indirect costs. If you only budget for the things you immediately associate with running a specific type of business, you could find yourself with a hefty financial shortfall.

Want to learn more about indirect and direct costs — as well as numerous other facets of starting up a new business? Bring in the consulting experts at McManamon & Co., which specializes in small and midsize businesses. Call us at 440.892.9088 or contact us online today.

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