Unexpected Small Business Costs

Updated on:
July 20, 2023

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Starting and running a small business can be both exciting and challenging. Entrepreneurs often focus on the more apparent startup costs, such as purchasing inventory or leasing office space. However, there are several hidden or unexpected expenses that small business owners need to be aware of. In this article, we’ll discuss some of the most common unexpected small business costs that can impact your bottom line and offer suggestions on how to prepare for them.

Hidden Costs of Insurance and Licenses

As a small business owner, you’re likely aware of the importance of insurance in protecting your business from potential risks and liabilities. However, the hidden costs of insurance can often catch entrepreneurs off guard, leading to financial strain or inadequate coverage. Understand the true cost of safeguarding your business and ensuring you’re well-prepared for any unexpected insurance expenses that may arise.

Business Insurance

Many small business owners underestimate the importance of proper insurance coverage for their business needs. While it’s common to account for general liability insurance, you may need to consider additional insurance policies, such as property insurance, workers’ compensation insurance, and professional liability insurance. These policies protect your business from various risks but can add to your overall business costs. Make sure to research the insurance requirements for your specific type of business to avoid any surprises.

Business Licenses and Permits

Obtaining the necessary business licenses and permits is essential for operating your new business legally. However, these licenses can come with unexpected costs, especially if you’re required to renew them annually. It’s essential to research the specific licenses and permits required for your business and factor them into your startup costs and ongoing expenses.

Employee-Related Expenses

Running a small business often involves hiring and managing a team of dedicated employees to help achieve your goals. However, many business owners underestimate the additional costs associated with bringing new employees on board and maintaining a happy and productive workforce. Gaining a comprehensive understanding of these costs will help you budget more effectively and ensure that you provide a supportive work environment for your valued team members.

Hiring New Employees

Adding new employees to your team can significantly impact your business expenses. Beyond their salaries, you may also need to cover the costs of benefits, training, and payroll taxes. Additionally, you may need to invest in new equipment or office space to accommodate your growing team. Be prepared for these additional costs and have a plan in place to manage them effectively.

Employee Theft and Shrinkage

Unfortunately, employee theft and inventory shrinkage are common problems for small businesses. These unexpected costs can put a strain on your cash flow and impact your bottom line. Implementing inventory management and accounting software can help mitigate these risks, and regularly auditing your inventory and financial records can help identify any discrepancies early.

Workers’ Compensation Insurance

If you have employees, you most likely will be required to carry workers’ compensation insurance. This coverage protects your workers in case of work-related injuries or illnesses, but it can also add to your business costs. Be sure to factor in workers’ compensation insurance expenses when calculating your overall employee expenses.

Professional Services and Legal Fees

Though often overlooked in initial budgeting, these services can be invaluable in navigating complex legal and financial landscapes. Knowing the potential costs of these services, you can better prepare for and manage your business’s financial obligations and make informed decisions about when and where to seek professional assistance.

Legal Fees

Starting a new business often involves navigating complex legal requirements, such as forming a business entity, drafting contracts, and ensuring compliance with local, state, and federal regulations. Hiring an attorney to help with these tasks can be costly but is often necessary to protect your business from potential legal issues down the line.

Accounting Services

Proper financial management is critical for the success of your small business. Many business owners choose to hire an accountant or use accounting software to manage their finances. These services can be expensive, but they can save you time and help ensure that your business remains financially healthy.

Unexpected Maintenance and Emergency Expenses

Running a small business comes with its fair share of surprises, some of which can be in the form of unexpected maintenance and emergency expenses. Whether it’s a sudden equipment breakdown, a natural disaster, rising inflation, or an unforeseen repair, these costs can catch even the most prepared business owner off guard. By understanding the potential risks and financial implications of these expenses, you can better prepare your business for the unexpected and maintain a strong financial footing in the long run.

Office Space and Equipment Maintenance

Maintaining your office space and equipment can result in unexpected costs. Regular maintenance is essential to prevent more significant, more expensive problems from arising, but it can still impact your business budget. Prepare for these costs by setting aside funds in an emergency fund to cover unexpected maintenance and repairs.

Emergency Fund

Unexpected expenses can arise at any time and can put a strain on your business’s cash flow. Establishing an emergency fund can help you manage these unexpected costs without taking on additional debt or compromising your business operations. Aim to set aside enough funds to cover at least three to six months of business expenses to provide a financial safety net in the case of a lack of funds or a seasonal slowdown.

Payment Delays and Interest Rates

Cash flow is crucial for small business success, and payment delays can significantly impact your bottom line. Late or unpaid invoices can lead to cash flow issues, making it challenging to cover day-to-day operational expenses or invest in new opportunities. Implementing a robust invoicing system and offering various payment options can help minimize payment delays and ensure that you maintain a healthy cash flow.

Interest Rates on Business Financing

Many small business owners rely on business financing, such as loans or lines of credit, to fund their operations or expand their businesses. However, interest rates can be an unexpected cost, especially if they fluctuate over time or if you have a variable interest rate on your loan. Be aware of the potential impact of interest rates on your loan repayments, and factor this cost into your financial planning.

A better solution may be a merchant cash advance as you have a clear understanding upfront of what your financial commitment will be as the MCA funder deducts a predetermined percentage from the merchant’s daily or weekly revenue making it more transparent.

Self-Employment Tax and Co-Founder Expenses

Small business owners who are self-employed are may be responsible for paying self-employment tax. This tax covers Social Security and Medicare contributions, and it can surprise many entrepreneurs who are used to having these taxes automatically withheld from their paychecks as employees. Make sure to factor self-employment tax into your overall business expenses to avoid any surprises come tax time.

Co-Founder Expenses

If you have a co-founder or partner in your business, you may need to account for their salary, benefits, and other expenses. This can be an unexpected cost, especially if your co-founder contributes significant time and effort to the business. Be sure to discuss compensation expectations upfront and include these costs in your business plan and financial projections.

Preparing for Unexpected Small Business Costs

While it’s impossible to predict every unexpected expense that may arise, being aware of these common hidden costs and planning for them can help minimize their impact on your business. By researching the specific expenses associated with your type of business and setting aside funds in an emergency fund, you can better prepare for these unexpected costs. But if you are surprised by an expense, remember, a merchant cash advance can get businesses funding in as little as 24 hours so that the unwelcome surprise does not derail your business.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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