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The Overlooked Costs of Running A Small Business

Anyone with an entrepreneurial spirit and a great idea can start a small business, the trick is staying profitable and successful past the honeymoon stage. Only about half of all small businesses with employees survive past the first five years, and the SBA Office of Advocacy shows that small business failure has little to do with the type of business or even the strength of the economy.  Survival rates remain steady through economic downturns and across industries. This suggests that the companies that survive are simply more adept at dealing with obstacles in their way. New small business owners in particular may not be aware of the hidden costs of running a small business, such as insurance and industry association fees. Business owners of all experience levels can fall victim to overlooking the price of doing business, whether because they only expected to pay a one-time fee or fail to consider how not spending in the short-term can hurt in the long run. [Tweet "Only about half of all small businesses with employees survive past the first five years."] In order to encourage young entrepreneurs to continue starting small businesses (the rate of youth entrepreneurship dropped 23 percent from 2002 to 2012), we need to ensure that all business owners understand all the possible pitfalls of owning a small business, not just older Americans (whose entrepreneurship rate increased in that same time period as their population grew). This speaks to a fear of failure, but a healthy economy is one that supports all good businesses and doesn’t undercut a company providing a needed or popular product. Understanding overlooked costs is a smart way to avoid a premature end to an otherwise successful endeavor.

Payroll

The price of paying employees shouldn’t outstrip what is actually owed to them.  40 percent of small businesses still resort to manual practices when it comes to doing payroll, such as asking employees to fill out time sheets by hand and asking HR to dedicate days each month to calculating those hours.

Employees are notoriously bad at filling out timesheets after the fact, even when asked to do so multiple times per day meaning businesses could be paying employees for hours not actually worked. Additionally, HR representatives are guaranteed to make accounting errors if calculating by hand, and the time needed to perform this task can be 70 percent higher when done manually.

Asset Management

Small businesses may think that things like “asset management” (for both inventory and fixed assets) is something big companies and multinational corporations engage in, not small businesses. Keeping track of the long-term pieces of property that help produce income (such as computers, vehicles and buildings), as well as monitoring the state of the supply chain to ensure that inventory efficiently moves from raw materials to a finished product on the doorstep of customers, is important for companies of all sizes.

Related Article: OVER LOOKED COSTS THAT WILL PUT COMPANIES OUT OF BUSINESS

Inventory management is crucial for having a balanced inventory ratio. Small businesses want enough inventory ready to always meet demand, but not too much that the carrying costs, such as setup, holding and shortage costs (which can represent 25 percent of inventory value on hand) drag down business. Fixed asset management is necessary for always knowing where important property can be located, the condition the property is in (i.e., does it need maintenance, or is the warranty about to expire?) as well as for tax accounting purposes.

Depreciation

From an accounting standpoint, depreciation is the process of allocating the cost of fixed assets over their expected “useful lives.” Depreciation must be accounted for both on the company’s general ledger and for tax reporting. Failure to accurately depreciate assets when reporting to the IRS (for example, applying the same depreciation method each year of the asset’s lifespan) can lead to financial penalties.

Legal fees

Running afoul of the law is never something small business owners expect to do, but unfortunately SMBs are often the target of frivolous lawsuits. Though settlements for small businesses are rarely more than $5,000 per case, those numbers add up, small businesses pay out over $35 billion in settling lawsuits each year, and can also increase the cost of insurance premiums. One example of a potential lawsuit comes as the result of poor time and attendance tracking: Rather than overpaying employees, you could be underpaying them (or even worse, not having the digital records to protect against former employees who knows you can’t prove the timesheets were accurate and wants to settle a score) and setting yourself up for Fair Labor Standards Act lawsuits, which have become more common in recent years.

Opportunity Cost

It can be tempting for small business CEOs to wear numerous hats and perform duties like accounting or handling lawsuits themselves, or ask the same of employees, rather than pay someone else to do it. For example, small businesses often perform accounting services like bookkeeping, payroll, auditing and tax planning in-house. While doing this saves money in the short-term, forcing employees and managers to allocate their time to the maintenance of the business prevents them from contributing to growth, which should be their main focus. In fact, considering that 74 percent of owners don’t understand how ghost assets affect their books, many CEOs may be bleeding their company dry in the name of saving money without even realizing it. There are some duties that it simply makes more sense to outsource, for the mental health of employees and the financial health of the company. Many of these costs are interconnected and feed into each other. Not having a quality asset management system can lead to issues with depreciation accounting and legal issues; the time spent manually calculating time and attendance and dealing with books or lawsuits takes away from time spent finding new markets and expanding or improving business. Suddenly, a once-profitable business finds itself putting out fires everywhere from the supply chain to the tax records, rather than focusing on the business itself. Companies that want to maximize their revenue need to stop letting overlooked costs take unseen or unexpected bites out of income. By utilizing new technology, instituting better business practices and knowing when to delegate certain time-and resource-consuming tasks, small business owners can more easily scale the trials and tribulations that come with operating in an increasingly complex global economy. How many of these start-up costs did you overlook when starting your business?