The Best Business Owners Understand the Cost of Doing Business
This is a guest post from Jori Hamiliton (see bio at the end) – thanks for sharing Jori!
As of 2019, there were 30.7 million small businesses in the United States alone. And yet, in spite of the enormous number of startups in existence, roughly half of all small businesses don’t survive past the five-year mark. While the various factors that can lead to a failed business are many, one of the most common issues revolves around incorrect expectations on the part of small business owners — especially when it comes to the costs of doing business.
If you’re a small business owner, or you’re thinking of becoming one and you want to be in that upper half of success, here are a few considerations that can help you truly understand the costs that come with doing business.
Setting Expectations (for this Article)
If we’re going to claim that it’s important to set proper expectations in business, then we should also do so for this article as well. Before we dive into counting the nitty-gritty costs, it’s important to make one thing clear: none of the below items are meant to be specific. Nor are they supposed to be formulaic.
Why? Because each business is unique. Each one comes with its own costs, challenges, expenses, hurdles, and various expenditures. Factors like your geographic location; federal, state, and local taxes; competition; existing capital; industry knowledge; and marketing acumen can all impact the particular costs of business.
The goal of this article is to give you a heads-up to various considerations that often fly under the radar when preparing to launch a business. As a member of a Peer Group Advisory Board put it, “Have patience, things will take longer and cost more than you think.”
That said, let’s dive into this thing, shall we?
The Cost of Starting a Business
Starting a business is always a pricey endeavor, whether you’re trying to crack into a larger global industry or simply start a mom and pop shop on your local street corner. Either way, there are always numerous expenses to consider. A few of the more universal costs involved with a startup include:
- Documentation and fees associated with creating the legal entity.
- Insurance and permissions, everything from general liability insurance to government licenses and permits.
- Market research, time, and resources spent creating a business plan.
- Interest accrued from borrowed start-up funds.
- Equipment and technology purchases to set up either a physical or remote office.
- Rental space for a physical office or warehouse.
- Employee expenses, such as payroll and benefits.
- Advertising and PR expenses.
- Manufacturing, supply chain, and shipping costs — especially if you sell a physical product or in-person service.
- Taxes and outsourced responsibilities, such as hiring a lawyer or accountant.
While these are not always involved in every startup, they generally factor into the costs at some point or another along the way.
The uniqueness of each situation makes it painfully important that you remain aware of the numbers to know in your business. This includes obvious items like your current balance sheet and income statement as well as more nuanced things, such as the margins in each area of your fledgling company.
The Cost of Surviving as a Business
Once your business is up and running, it’s easy to feel like the worst is behind you — financially speaking. After all, you’ve survived the upfront expenses and you may even already be generating income. However, there are many costs that remain painfully present as your business attempts to survive the early, often turbulent years of its existence. This includes ongoing expenses such as:
- Renting an office space or warehouse.
- Ongoing supply chain and manufacturing costs.
- Employee payroll and benefit costs.
- Taxes and recurring legal fees and permits.
- Promotional costs.
Often these expenses only increase as your company begins to find traction and generate more business.
Fortunately, there are a lot of options out there to reduce the ongoing costs associated with maintaining a business. Going paperless is an excellent strategy that leads to a huge savings in costs for some businesses. And smaller changes can make a big difference as well, there are many areas where you can trim costs, such as labor, inventory and overhead, and accounts receivable.
Whatever you do, it’s unlikely that your costs will completely go away. As an example, reducing costs by eliminating paper and printing, still involves a recurring subscription to a replacement Software as a Service product. It’s less expensive but it still factors into your bottom line.
The Cost of Scaling a Business
Finally, there are the costs associated with scaling your business. It’s easy to picture your enterprise smoothly riding a wave of success as it grows over the years, but often the impetus of that momentum comes from money — borrowed money.
Chances are when it comes time to scale your business, you’re going to need to access to larger amounts of capital to fund new equipment, develop new products, grow the size of your workforce, and so on.
Capital will already cost you quite a bit in interest, but if you haven’t managed to maintain a healthy business credit score as you go, you may find that you have to pay even more in interest in order to bankroll your potential growth. And if you get turned down for a loan, you may even have to take a riskier approach, such as getting a cosigner or making a larger downpayment, strategies that can cost you even more money.
Good credit or bad, once you reach the growth stage, chances are you’ll be comfortable with larger sums of money coming in and out of your business. Nevertheless, it won’t change the fact that huge sums of borrowed capital can — and likely will — be on the line as you try to scale your company and pay for the expected new expenses that come with increasing your existing operations and activities – more people, more space, more equipment, etc..
Truly Understanding the Costs of Doing Business
Starting a business is a romantic notion. It’s part of the American Dream, and it’s a genuinely rewarding endeavor — when you can survive the early challenges. If you want to be in the half of businesses that survive that first five years, though, you need to take the costs associated with your entrepreneurial activity seriously.
Everything from nickel-and-dime startup costs to ongoing expenses to borrowed funds for growth should be calculated with the utmost respect and attention. If you can launch your startup with a genuine understanding of the costs involved, you’ll immediately be putting yourself in the best position possible to ultimately succeed in the months and years that lie ahead.
Jori Hamilton is an experienced writer residing in the Northwestern U.S. She covers a wide range of subjects but takes a particular interest in covering topics related to business productivity, marketing strategies, and HR solutions. To learn more about Jori, you can follow her on Twitter and LinkedIn.
Shawn Kinkade Kansas City Business Coach