Unexpected Costs of Running a Small Business
“I had no idea.”
You’ll hear new small business owners utter this fairly common phrase ad nauseam throughout their first few months of startup life. And unfortunately, it’s usually in response to discovering many of the unexpected costs of running a company.
Truthfully, it doesn’t cost much to start a small business. Shopify says that number is a mere $40,000 on average. But the longer your company stays in the ring, the more financial punches start to come your way. And while there’s plenty of costs you’ll expect (new hires, rent, technology), there are many you probably haven’t thought about.
We’re probably about to put your mind at a little unease by exploring several unexpected costs of starting a small business. The goal here isn’t to dissuade you, but to make sure you’re better mentally (and financially) prepared for the adventure that lies ahead.
5 Unexpected Costs of Running a Small Business
Debt
The word “debt” often gets a worse-than-deserved rap when it comes to small businesses. Yes, when poorly managed, taking on too many IOUs is a recipe for disaster. But some small business debt is often a necessary step to a new stage of growth. So if at some point, your startup needs to find a fresh form of financing, don’t dismiss debt out of hand.
But also remember that debt almost always has a cost. If you take out a sizable loan to finance a new warehouse or to purchase new equipment, you’ll be looking at a new monthly payment to the bank, too. At the time of writing, NerdWallet says the average interest rate on a small business loan is 3.19% to 6.78%; so remember this potential cost as you’re thinking about the future.
Supplier Cost Hikes
When you’re first setting up your business, you naturally go out and find suppliers that will provide you with everything necessary to produce your products or offer your services. You sign a contract, you calculate that cost in your projected budget, and you move along.
But if 2022’s bout of rampant inflation has reminded us of anything, it’s that prices aren’t fixed. Even when inflation broadly is low, outside factors can cause individual suppliers’ prices to rapidly rise.
There’s obviously no way to predict when your next supplier will demand 10%, 20% or 30% more for their wares. But it’s a possibility you should model into your projected budgets each year so you’re at least aware of the potential impacts before that ax ever falls.
Shrinkage
Shrinkage is certainly one of the most unexpected costs of starting up a small business. Indeed, many new business owners don’t even know what the term means.
When you sell a product, your inventory shrinks. Makes sense. But your inventory can also shrink if some of your products get damaged, someone in the warehouse miscounts or an employee steals from the company.
Those last three things are examples of shrinkage, which traditionally is thought to amount to roughly 2% of sales on average. And while shrinkage most commonly occurs in retail (think clothing stores or grocers), it can happen in virtually any kind of business. That company pen you accidentally took home from the office? Technically speaking, that’s shrinkage.
Employee Turnover
Small business owners are well aware of the costs of bringing on new workers: salary, sure, but also employee benefits, even office space and the equipment they need to do their jobs.
But they never think about the costs related with losing workers.
When an employee quits, you suffer a one-two punch of dropped productivity and the various costs involved with hiring someone to take their place. Indeed, employee turnover isn’t just one of the most unexpected costs for small businesses — it’s one of the biggest ones.
“The cost of replacing an individual employee can range from one-half to two times the employee’s annual salary,” says a 2019 Gallup study. “And that’s a conservative estimate.”
So, do everything you can to keep your employees from burning out.
Taxes
Small business owners definitely expect to pay some taxes as part of building a new company. But what usually takes them by surprise are just how many types of taxes they end up having to fork over or at least account for.
Self-employed workers, for instance, have to deal with self-employment taxes (Social Security and Medicare). If you’re an employer, you have to deal with income tax, sure, but you also have to contribute Social Security and Medicare taxes for your employees, not to mention federal and state unemployment taxes, among others.
Heck, depending on your business, you might even be forced to pony up excise taxes, which are special taxes on certain goods (cigarettes, gasoline and more).
Always Be Prepared
Many small business owners often have to learn on the fly, but there are plenty of things you don’t want to come up against cold – and that includes unexpected expenses.
McManamon & Co. can help. We’re an accounting, tax, fraud, forensic and consulting firm that offers custom services to small and midsize businesses across a broad spectrum of industries. And among other things, we provide broad consulting services to firms, covering a wide array of subjects including the various costs you’ll need to prepare for as a budding small business.
Learn more about what we can do for you. Call us at 440.892.8900 or contact us online today.
Tags: McManamon, small business, small business costs, small business taxes | Posted in McManamon & Co., small business, Small business finances, small business taxes