9 Hidden Costs of Business
It costs money to make money. It’s a basic business principal that business owners are largely OK with. “I’ll spend X to make my product because people will pay Y to get it and Y is greater than X.” And that’s how money is made.
Then it’s like an eighth-grade math problem: Solve for X.
The cost of doing business is far more than just materials, rent and wages. There are expenses that have a way of sneaking up on business owners, making X a bit of a moving target. Here is a list of some of the most common hidden costs of doing business:
1) Inventory Shrinkage
Ever lose a sock in the dryer? You’re never sure where it went, but you know you have to buy new socks. This can be true of your inventory. Employees stealing, customers shoplifting and clerical errors all lead to costly reductions in your inventory. Each one comes at a cost.
2) Employee Turnover
Business owners know they have to pay employees, but if you suffer from a high turnover rate, the costs skyrocket. The investment it takes to search for, select and train a new employee is substantial, and the more it happens, the more it costs. A good thing to consider is an employee retention program as part of your business model.
3) Employee Benefits
A paycheck is more than the dollar amount owed. Taxes, benefits and perks all need to be included. Are you a restaurant that feeds your employees? Do you give an employee discount? The true cost is closer to 40% greater than the salary alone.
4) Administrative/Operations Costs
Your office isn’t just a room. It’s papers, folders, staplers, computers, a desk—and everything else. But there are also things like snow removal, because people can’t buy what you’re selling if they can’t get in the parking lot. These are just examples of the additional costs that spring up throughout the year.
5) Transaction Fees
Allowing customers to pay with a credit card is pretty much the standard, but that standard can carry up to 3% in processing fees. You likely need to allow people to pay with their cards, so you need to factor in those fees.
6) Overdue Payments
You deliver on your end of the bargain, but the person you sold to doesn’t pay up. Soon, 30, 60 or 120 days go by and you’re still stuck waiting. These holdouts can push a business into the red when it should be in the black.
Just like with a new home, things break. Equipment is often vital to the production of any product or service, so when it’s down, there’s little choice but to pay to have it fixed or replaced.
8) Licenses, Permits & Insurance
This fluctuates wildly depending on the industry you’re in. Liquor licenses are the cautionary tale here, but it’s hardly the only industry that can be hit hard by license and permit fees.
9) Legal Fees
Businesses need to protect themselves from legal challenges that can come from all sorts of places. Good lawyers charge good money.
It’s not about avoiding these costs, because some are just unavoidable. Rather, it’s about understanding that these exist and factoring them into your budget before you flip the OPEN sign. Each business or industry can have unique hidden costs.