As any seasoned executive will tell you, businesses are costly. Often the profits of a business are just a few percent of the revenue.
The rest of the money has to be spent keeping the company competitive.
Why? Because if companies are making big profits, other entrepreneurs will enter the market and grab a piece of the pie.
That’s why businesses put so much effort into reducing costs. It’s costs that really affect how much the people at the top get paid and how much dividend investors get.
But many small businesses don’t realize how much going into business will cost.
They imagine that they’ll be able to run a business on a shoestring and fail to account for all the little costs that add up. This can ultimately land them in big trouble.
So what are they overlooking?
Credit Card Fees
Most businesses pay day to day expenses on their credit cards.
It’s a secure way to transact. But it’s also very helpful for separating business from personal costs. You just have one business account to which you charge all your expenses.
Then, when you come to file your accounts, it’s simply for your accountant to see how you’ve spent revenue and what taxes must be paid.
So that’s the good news. The bad news is that small businesses often end up building up large credit card fees at the end of the month. That’s because they didn’t plan for cash flow issues when they started.
They assumed that they wouldn’t be going into debt on a month by month basis. But upfront costs like wages, which would even out over the year, can put businesses into the red when products are yet to be sold.
Saving money on large credit card fees is possible, but you have to plan in advance. If you believe that you might have cash flow issues in the future, you need to borrow more today.
It’s perfectly acceptable to spend more than you receive in any given month. What’s not acceptable is failing to plan for that eventuality and getting saddled with a big credit card bill.
Many small business owners don’t seem to recognize the value of their own time.
Often they’ll spend lots of energy doing things like paperwork or data entry when these are things that could be farmed out to staff.
At other times, they’re running around putting out fires or trying to balance the books.
It all comes down to the concept of opportunity cost.
When you spend time doing something that could easily be done by a colleague, you give up time that could be spent doing something more productive.
And when you give up on the more productive tasks, you’re increasing your costs.
Delays In Payment
If you’re in business right now, you’ll be well aware of the problem of payment delays.
You send out invoices, but nobody ever seems to respond – on time at least. And even if they do respond on time, other problems can creep in. There are delays at the bank.
Finance departments are on holiday. The postal service is slow.
The problem for small businesses is that they can’t just delay their out-payments. They have to pay them on the dot every single month. So the mismatch between money paid out and money coming in can grow out of control.
Getting payment on time is, therefore, a top priority. As a small business, you should do everything you can to avoid going through financial hardship, just because payments were not made on time.
First off, try to build in a financial cushion. Your business should be able to operate for a couple of months without any customer payment at all.
Secondly, do everything you can to make sure that your clients believe that your payments are urgent. Here you might want to take tips from the type of invoices sent out by the big boys. Heck, you probably get a few of their invoices yourself.
Finally, send payment reminders a couple of days before payment is due. Don’t worry about time; you can get software that will do this for you automatically.
Corporate taxes in the US are high right now, and represent a major cost to business. But failing to comply with tax regulations can have an even more devastating impact on your bottom line.
Each year companies are fined millions of dollars for making small mistakes on their tax returns. As everybody knows, the IRS is brutal.
That’s why it’s a good idea to at least have a consultation on the issue. You need to be aware of issues like planning for sales tax, local and federal income tax and how to enhance your cash flow.
You can learn more from Brown Smith Wallace.
Ah yes, shrinkage. The dreaded nemesis of all retail businesses. Shrinkage is a general term that applies to a loss of stock somewhere between when you bought it from the supplier and sold it on to a customer.
Perhaps goods were damaged and not fit for sale. Maybe goods were stolen by customers or employees. Perhaps goods went missing in your supply chain. Fortune estimates that shrinkage costs retailers about $32 billion each year. And it probably costs you a lot of money too.
So what can you do about shrinkage? Well, one solution is to invest in an inventory management system. You want to know exactly what goods you have in stock at any given moment.
But shrinkage seems to be a relatively intractable problem. If businesses could do something about it, they would. So the best policy is to include shrinkage in your cash flow forecasts.
In other words, plan for the worst-case scenario and hope for the best.
Companies need a few forms of insurance before they even get started. One is employee liability insurance if you have any employees. The other is vehicle insurance on any vehicles you or the company uses.
But there are other insurance costs too. If you’re in the business of doling out advice to clients, you probably want professional indemnity insurance. And if customers travel to your site or to any events you organize, you’ll also need public liability insurance.
These costs aren’t usually the biggest, but they’re not small either. They can soon build up and end up costing you a small fortune.
Most businesses won’t negotiate with their insurer. But negotiation is the key to making sure you get a great deal. One way to save on the cost of insurance is to have it all bundled up in a single insurance package. Ask for discounts and threaten to go elsewhere if you don’t get any.
Also, don’t continue to pay out on insurance that you don’t need if your business changes. Different operational models will have different risk profiles.
Most business owners want to provide a healthy living for the people that work for them.
It’s a matter of pride to look after one’s employees.
However, what business owners don’t want to do is take on people who end up costing them money in the long run.
Sure wages are expensive, but most employees make back those salaries and more in additional revenue. Some employees, however, do not.
These are the employees that turn up late, do a bad job and ruin your reputation.
Saving money on employees often means spending money on getting great employees. If you’re offering low wages, you’re unlikely to attract the best talent.
So bump up the salaries and benefits you offer.
Equipment and Upgrades
Most of the costs that we have discussed so far are known before a person goes into business. But the costs of equipment, maintenance and upgrades are seldom factored into projections.
Things like printers, scanners, computers, even files, and folders, can end up costing a lot of money. So how do you save?
Well, one option is, of course, to buy equipment second hand. It’ll likely need more maintenance, but you reduce the initial capital expense. Things like computers tend to fall dramatically in price year to year.
You can also invest in cover plans, should equipment go wrong. Often a small $50 payment to cover a computer for a couple of years is better than paying hundreds of dollars to have parts replaced.
Small businesses tend to think that they need a dedicated office space. But do they really? In today’s economy where so many transactions are done online, is the extra overhead worth it?
There may, however, be zoning issues that mean you can’t use your home as an office. So what to do? One option is to rent temporary office space from firms like Regus or Share Desk.
They’re usually already equipped with the internet and a receptionist service. The other is to bite the bullet and rent your own space outright. Don’t go for more square footage than you need though, unless you plan to expand rapidly.
Business costs can soon mount up and overwhelm your ability to pay. That’s why each cost should be carefully considered so that your business can stay afloat.
Guide created by S. Himmelstein & Company a leading manufacturer of torque tranducers