How to Handle Hidden Costs of First-Year Businesses

Post Date: May 21, 2019

No business owner likes surprises, especially those that cost money.

Regardless, new small-business owners often find that their first year of operation will be filled with unexpected challenges and opportunities.  To avoid unwanted surprises, business owners should be aware of potential hidden costs that may arise in that first year.  

As seen in the recent post, Entrepreneurial Dilemma: Do I Have Enough Money to Start My Own Business?, entrepreneurs can help themselves greatly by understanding the types of costs they will incur before starting and on an ongoing basis. Knowing how to handle hidden costs of first-year businesses is an important component of strong leadership and business planning. 

Planning for the Unplannable Costs 

Good business owners do all their due diligence. They develop a strong business plan, secure funding, project their cost of business startup, and launch with confidence. Despite all that careful planning, hidden costs can derail any well-thought-out plan. 

Below are a few of the most typical hidden costs that can catch business owners by surprise:

    • Employee Benefits. Your salaries and wages are an obvious ongoing expense. However, when planning your business headcount, those are not the only employee costs. Factoring in benefits like insurance and employee taxes is critical. There are also the costs of where those employees will work, the equipment they will need, and the operating budget that is required for them to do their job.   
    • Shrinkage. This concept applies to businesses that sell physical products. It refers to the loss of product, whether accidental or purposeful. Examples include shoplifting, employee theft, vendor fraud, and paperwork errors. Similar issues arise from spoilage or breakage. Shrinkage costs retailers billions in lost revenue every year. 
    • Professional Fees. It is prudent as a business owner to have trusted legal and financial advisors. Legal fees, in particular, can be a surprise as small businesses are often a target of frivolous lawsuits by plaintiffs looking to capitalize on the potential vulnerabilities of new businesses.   
    • Fees, Licenses and Permits. Starting a business requires dealing with many different bureaucracies. The fees, licenses, and permits necessary to operate legally can add up. The consequences of not obtaining the necessary approvals can be severe as agencies can fine, sanction or shut down a business, either temporarily until they are in compliance or permanently. 
    • Administrative Costs. It may seem trivial, but the costs of paper clips and staplers can add up. Administrative costs include basic office supplies, office equipment (which can break, requiring repair visits or workarounds), cleaning supplies, and consumables that may be more expensive than initially thought. 
    • Insurance. Business owners may not understand the sheer number of different insurance policies they may need. While it may not seem necessary, you need to consider the following:
          • General small business insurance
          • General liability insurance
          • Errors and omissions insurance
          • Worker’s compensation insurance
          • Commercial vehicle insurance
          • Property insurance
          • Cyber insurance
    • Product Development. If you are building products, you will need to invest in design, engineering, manufacturing, packaging, storage, and distribution costs. Because you may not know when you arrive at the right finished product, these costs could endure beyond the first year.

Finding The Right Business Partners 

New businesses have unique needs and opportunities. At Benetrends, we support entrepreneurs with business funding strategies that leverage existing 401(k) funds and business services including retirement plan managementcredit card processing, legal services, and business insurance. To learn more about how Benetrends helps entrepreneurs realize their dreams of business ownership, read Benetrends’ funding success stories.

Categories: Blog

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