The Hidden Costs of Running a Small Business
Pursuing and running a small business comes with a lot of costs, and some of those costs might be less obvious than others. Of course, you expect to pay for supplies and to pay your employees. But running a business is as complex as it is demanding, and there are many costs that may not be as apparent.
For this article, we gathered input from small business experts about some of the hidden costs of running a small business today. What costs are unexpected and how has the pandemic affected things? Read on to find out.
While it isn’t easy to measure in dollars and cents, turnover is always one of the biggest hidden costs of doing business. The restaurant industry has been feeling this in particular as it has had difficulty re-hiring much of the workforce it lost due to the pandemic.
But the restaurant industry isn’t the only one that struggles with turnover. Andrew Latham, certified personal finance counselor at SuperMoney.com, offered his input on turnover. “On average, losing an employee costs at least a fifth of their annual income, and this doesn’t include intangible costs that can be even more costly to small businesses, such as damage to morale, brain drain and lost skills.”
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Licensing and Insurance
Licensing and insurance may not be the most interesting topics for everyone, but they are very important nonetheless. And they can also be quite costly for your business depending on the nature of what you do. “Some small businesses have significant costs associated with licenses required to operate,” says Matt Sotir of Equitable Advisors. “In addition to these fees there may be credentialing requirements as well. Think of opening a barbershop, you need state and local business licenses as well as formal training at a barber school and probably a requirement to renew this license and training over time.”
Just about every business needs capital to continue to grow. What people often don’t think about, though, is that the financing itself can be a hidden cost. “A large number of business owners tend to view investment capital as a single unchargeable unit,” says Alina Clark, co-founder at cocodoc.com. “The truth is, even the investment capital, especially when it comes from a loan, has its own costs.”
Indeed, as business owners, we might think that once we get our financing, we are all set. But there’s more to financing than just receiving a sum of money, as Clark explained further. “Any loan has a line of costs hidden in fine print. There are processing fees, annual fees and initial interest to be paid at the point of taking out the loan. Paying attention to the fine print when seeking a loan may help you save something.”
Social Security and Taxes
Social Security and taxes are costs we don’t always like to think about, but they are just a necessary part of doing business. Both can add significantly to the cost of doing business, especially if you have employees. Matt Sotir also gave his input here. “A business owner who works for themselves now has to pay self-employment taxes. The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for Social Security (old-age, survivors and disability insurance) and 2.9% for Medicare (hospital insurance).”
Sotir continued that business owners sometimes try to lessen the impact of taxes by paying themselves less, but this strategy has its drawbacks. “Often, owners ‘underpay’ themselves in salary to lower this tax and this, while being a benefit short term, can significantly lower their Social Security benefits at retirement when they need the income the most.”
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