5 Hidden Costs of Running a Business

costs of running a business

An important key to business success is managing cash flow so you have enough money on hand to pay bills when they come due.

In order to do this, you need to budget for expenses, and expect to have unexpected (or not so obvious) costs.

Below are some hidden costs that can drain your cash — unless you plan for them.

1. Shrinkage

No, it’s not a condition described on Seinfeld. It’s a reduction in inventory resulting from employee theft, shoplifting and administrative errors.

The Global Retail Barometer pegs the annual loss to retailers in the U.S. at $42 billion. And retailers aren’t the only businesses affected. Employee theft occurs in all types of companies. You can, of course, reduce your exposure by implementing loss prevention practices (e.g., employee training).

Nonetheless, you won’t be able to eliminate it entirely. Some employees will steal no matter what and it will drain money from your company.

2. Employee Turnover

A stable workforce is a money saver. When employees leave and you have to replace them, you face the cost of:

  • Contesting erroneous unemployment benefit claims. If employees leave voluntarily, they aren’t entitled to benefits, but if you don’t contest their claims your unemployment insurance costs will rise.
  • Recruiting replacements. Even if you post job openings for free online, it takes the time of you and your staff to interview applicants and make hiring decisions.
  • Training.  Training, which can be internal (e.g., supervisors spending time with new employees) or external (e.g., additional training to get an employee licensed for their new position), is a serious expense.

3. Payroll Taxes and Benefits

When you hire an employee, the wage paid to the worker is only a part of the overall cost of employment.

According to an MIT lecturer, the overall cost can run from 1.25 to 1.4 times the basic pay (e.g., a $40,000 salary costs a business between $50,000 and $56,000; a $100,000 salary between $125,000 and $140,000). Additional costs include:

  • Employment taxes. This includes the employer share of FICA (for Social Security and Medicare taxes), federal unemployment tax (FUTA) and state unemployment tax.
  • Workers’ compensation. The amount varies by industry and job description as well as the state you’re in, but it can be pricey.
  • Fringe benefits. The range can be narrow or broad, but can include health coverage (whether or not mandated by law), retirement benefits, and other perks.

4. Legal Fees

You never know what’s going to happen. Small businesses are the biggest victims of frivolous lawsuits, according to the NFIB. Bogus and legitimate lawsuits cost small business owners in many ways:

  • Settlement costs. While the NFIB reports that settlements are often less than $5,000, they total $35.6 billion annually for small businesses in the U.S.
  • Higher insurance costs. After being victimized by bogus lawsuits, liability coverage premiums likely increase.
  • Lost opportunity. The time and attention that owners devote to lawsuits means time and attention not spent on running their businesses.

5. Repairs and Replacements

Things break, and if you still need the equipment, you’ll have to repair or replace them. The cost of repairs can be pricey, with sole proprietors (Schedule C filers) paying more than $16.7 billion in 2012. Annual maintenance costs to keep equipment in good running condition should be an ongoing expense to avoid the higher costs of repairs or buying new equipment to replace the old.

Final Thoughts

These aren’t the only hidden costs to consider. If time is money, as the adage says, then how you spend your time can be a big hidden cost for your business. Open your eyes to costs you may face so you can budget for them and be ready.

Hiding Photo via Shutterstock

Barbara Weltman Barbara Weltman is the Tax Columnist for Small Business Trends. She is an attorney and author of J.K. Lasser’s Small Business Taxes and The Complete Idiot’s Guide to Starting a Home-Based Business. She is also the publisher of Idea of the Day® and monthly e-newsletter Big Ideas for Small Business® and is a trusted professional advocate for small businesses and entrepreneurs.