Are you the owner of a small business or considering starting up a small business? If so, this is the right article for you. Before you get caught up in unforeseen expenses and a mountain of stress, read this. Here are our best tips for business owners all across Canada and the United States about business expenses you should be prepared to account for. Being fully prepared for what’s to come so you’re not caught with big problems can be the determining factor in what makes your business a success. Read on to find out more about the types of expenses you should be ready to see coming with your small business.
Be Prepared!
The cardinal rule of business – or anything in life, for that matter – is to be prepared. If you are ready for what’s to come, you can budget for it and plan for it so you’re ready to tackle it head-on. Unexpected expenses could be a huge hit for any small business, especially a new start-up. Planning ahead and researching so you’re not caught off guard can help you manage a successful business. The first tip we can offer is to create a good old fashioned spreadsheet. In it, you should account for all of the business expenses that may come your way so you can budget accordingly.
10 Types of Expenses to Expect
If you’re running a small business and you’re new to the game, you may not be familiar with all the ins and outs just yet. But don’t worry, we’ve got you covered. Here is a closer look at 10 types of expenses you should expect and budget for with your small business.
Operational Costs
This may seem straightforward, but surprisingly, lots of entrepreneurs forget to log all of their operational costs. This can lead to trouble down the line if your sales are not high enough or your goods aren’t priced high enough to cover operational costs. Operational costs are everything needed for your business to run, which can include cost of goods, rent, salaries, transportation fees, advertising and marketing costs, commissions, and of course, taxes! When figuring out what to price your goods at, you can’t simply look at the cost of raw materials. You have to calculate what it costs you to actually create the product and the reality is that you need a place to work in and workers to complete the job.
Each and every cost you must incur to keep your business functional is an operational cost. Be sure to write these all out and the estimated costs for each on your spreadsheet. Marketing and advertising are usually essential to getting sales so this is a cost you can’t overlook. You may not have tons to invest in it, but you can’t cut it out completely to save money in most cases. You also need to factor in the costs of professionals you need to get everything off the ground and to maintain your business like attorneys, legal advisors, and accountants.
Cost of Living Raises
If you have staff, you have to make your annual budget based on salary raises. Generally, salaries should increase by at least 1% each year to cover the increases in the cost of living expenses. Most employees will be expecting this and some may even ask for more. If you haven’t factored this into your budget, you’ll be stuck possibly losing employees who don’t get a raise or dishing out funds you don’t have saved to pay them to keep working. Employee retention is a key element behind a successful business. In order to ensure your business keeps going and your employees continue to produce, you have to treat them fairly. Don’t let bonuses and salary increases sneak up on you. Plan ahead for them and prepare.
Rent and Raw Material Increases
Cost of living increases for individuals but costs goes up for businesses, too. The best way to keep track of your budget is to sign contracts with suppliers and landlords to guarantee your price. At least for a short period, you won’t receive any surprises. In the months leading up to a contract renewal, begin negotiations for new pricing. This will give you some time to figure out how much your costs will increase so you can in turn increase your sale prices slowly. If you jack up the price at the last minute, clients may not love that. And it may be too late to compensate for the money you need to pay out to your suppliers or landlord.
To be safe, be prepared. Get as much information as you can beforehand. Whenever possible, get a signed contract. A verbal contract can change at any given moment and it could mean disaster for your company if you aren’t raking in tons of sales just yet.
Insurance
Before you get going, you will need to consult with an insurance broker and a lawyer to figure out what kind of insurance you need for your company. Some insurance will be mandatory and you can be fined if you don’t have it. Other insurances are elective but could be very important in your line of work. There are some factors out of your control, like deliveries, supplier functions, and human error. If these problems arise, do you have to compensate your buyers? How will you do it?
Having an insurance plant to fall back on in the case of an emergency can save your business from financial disaster. If you aren’t sure where to start, you can meet with your own attorney and discuss the business plan. He or she will be able to help you figure out what’s really needed.
Equipment and Maintenance
As your business grows, you may need to invest in more modern equipment to boost your production and keep up with the competition. You should always have a safety fund set aside for new machinery and equipment. You should also ensure you have some money set aside for maintenance. Machinery can break down and even if it continues to function, proper maintenance will keep it working longer. To really get your money’s worth, be sure to care for your investment. Before taking out a dividend for yourself or offering bonuses to employees, make sure your safety account is sufficient.
Credit Card Fees
Accepting credit cards for your sales makes things so much easier for the consumer and is likely to boost your sales. However, you can’t forget that credit card fees apply to all transactions. It may not seem like much at first, but as your business grows, so will your credit card fees. Be sure to keep track of what the credit card companies charge you and include that in your spreadsheet. This way, you won’t be surprised at the end of the month when the bill arrives.
Credit card fees can vary by credit card company and by number of monthly transactions. Be sure to read all of the terms and conditions. If your sales drop one month, you may pay more per transaction. Always be on top of the charges that will be coming your way.
Utilities
Your rental space may not include utilities. That means you need to pay for heating, internet service, telephone service, and other utilities. All of these expenses should be logged in your spreadsheet so you’re never caught off guard. Rent isn’t the only fee that matters. Utility bills can add up very quickly, especially as your company grows. Amy incoming bills that come your way each month should be accounted for in writing. This way, you’ll never be surprised. When calculating your annual profits or your annual budget, be sure to include these operational costs, as well.
Permits
Does your business need a permit or license to operate? These necessities also cost money and they are costs that are recurring. This means they should be included in your handy spreadsheet. There is a lot to keep track of when running a business so you can’t expect that you’ll remember every last detail, no matter how straightforward it seems. When a business is just starting out, every last dollar counts. If you receive your annual license or permit renewals and you weren’t expecting it, that means you’ll have to shift money from somewhere else to pay for it. You can want to avoid these situations at all costs.
Postage and Shipping Fees
This is one of those things can easily be forgotten. It’s often a small fee but sometimes, it’s not so small of an expense. As a business grows, the cost of postage and shipping may dramatically increase. You have to remember to factor these costs into your operational costs. Again, the spreadsheet will come in handy for this. You can even set up formulas to automatically calculate the increases for you as your sales projections increase. The less unexpected expenses coming your way, the better.
The Unexpected
No matter how prepared you are or how organized, one thing in business is certain: you must expect the unexpected. The same way you might have a rainy-day fund in your personal life, you’ll need one for your business, as well. What will happen if you show up to work one day and a pipe has burst through the ceiling, flooding your office and damaging your equipment? Yes, insurance to the rescue. But what about all the papers you had with critical information? And how about the production delays caused by the damage?
All of this can dramatically affect your business so you must be prepared at all times for unexpected costs and setbacks. This is just part of a running a business. No matter how well you run it, you may have unexpected expenses creep up on you. The best way to get your company safely through the storm is to always be prepared.
How to Minimize Financial Distress
Managing unexpected costs can be difficult to do. A rainy-day account is a good start but keeping your business functioning is not easy when unexpected issues arise. You know to expect the unexpected, but there are still a few things you can do to ensure your business can weather a storm better than most. Here are some tips to minimizing financial distress.
Set Up Clear Payment Terms
To keep your business rolling, you need incoming money. If customers don’t pay you on time or at all, this can really throw a wrench in your plans and tank your whole business. To reduce the strain of unpaid invoices, set up clear payment terms with your customers. Discuss them in advance, work out a payment plan that works for them, and agree to the terms in writing. This will help you collect you funds on time so that if unexpected expenses come your way, you aren’t out of cash.
Keep a Credit Line Open
When you start your small business, you may be able to also secure a credit line from the bank. This can be an excellent source of funds to lean back on should something unexpected come up. Try to clear your credit line as quickly as you can and leave it ready for use as much as possible. The idea is for the credit line to be your last line of defence, not your primary source of income. If your business becomes too reliant on credit, you may find yourself shutting your doors sooner than you think.
Promote Employee Retention
It can save you money to keep employees on board rather than constantly looking for new ones. You’ll have to train new employees and production always slows down when there is high turnover in a business. It is a money-saver to keep good employees on board. Anything you can do to save money helps. To keep employees motivated, be sure to treat them with respect. Pay them a decent wage and if you can’t afford fancy perks, offer small gestures. They go a very long way. For example, offer free coffee to your employees, or treat them to lunch for special occasions. Offering them more flexibility can also be very helpful in keeping them motivated to work their bet for you.
Account for Loss
You have to factor in that some products will be lost, stolen, or damaged. Accounting for some projected losses can allow you to be more prepared for your business financially. As your business grows, losses may grow, as well. Keep that in mind when you are estimating costs. This little bit of forethought can help your business remain financially stable throughout the year.
Why Do Small Businesses Fail?
More often than not, a small business fails because it is mismanaged, not because the product or service isn’t good. A lack of experience can play a huge role in a failure of a business. A small business that fails is likely due to mismanagement of funds, underpricing goods or services, or not maintaining enough cash flow to keep the business afloat. Some of these can be avoided with a good plan and an organized manner of working. In some cases, a business simply fails due to other reasons out of your control, but for the most part, you can avoid failure with a solid business plan.
A small business also looks to save money to increase profits, but some cost cuts are detrimental to the success of a business. Investing in good staff and proper machinery are crucial elements to a successful business plan. Saving money for the expenses and ensuring you are prepared for anything, anytime is also an important factor in the success of your business. Marketing and advertising are also important so be sure to invest accordingly.
Getting Started Right
If you’re looking to start up a small business, take heed of the advice above. Plan ahead and build a business strategy that makes sense. Be ready for any and all expenses and ensure you can get enough credit to help you out when times get tough. To start a small business, you’ll likely need a small business loan. When borrowing funds, borrow a touch more so you can start your rainy-day fund before you start earning revenue. Unexpected expenses may come sooner than you think.
If you’ve suffered past financial failures or have bad credit, a traditional banking institution may not accept your loan request. But a direct lender like BHM Financial, Cash in 24, or even Canoco Consulting can help you out with a bad credit loan. That means your credit score won’t be factored into your loan request and you can still get the funds you need to start up your business instantly. Being your own boss will come with a lot of work attached to it. But with the right approach to operating your business and a little forethought, you can be well on your way to starting your dream job today!
Start with a business plan, a spreadsheet, and these tips and your journey to financial freedom and success in business could begin right now.