One of the most common financial problems that startups and small businesses face, particularly if they lack professional accounting and tax services, is that of underestimating their operating costs and expenses. Any solid plan for business growth requires a solid understanding of every dollar that’s going to be spent. Otherwise, unplanned expenses can quickly eat up profits.
In fact, various surveys we’ve seen suggest that anywhere from 1/3 to even 2/3 of first-year startups underestimate their expenses – sometimes disastrously so. There are many possible ways this can happen, but we wanted to highlight some of the most common issues we’ve seen.
Five Major Expense Miscalculations That Small Businesses Often Make
- Office Utility Costs
It’s very difficult for brand-new businesses to correctly estimate their utility bills, particularly if they have a lot of computers or other hardware on-site. Electricity and Internet bandwidth costs are almost always higher than expected. Even water usage can be overlooked.
When possible, try to get a leasing agreement that covers most\all of the utilities in the base cost for simple bookkeeping.
- Permits, Licenses, and Other Paperwork Fees
Don’t get in a hurry to open your doors! Check with your local business office – or hire a lawyer – to ensure you know all the necessary permits needed to legally operate. Also, in some cases there may be local trade organizations that aren’t technically requirements, but must be joined to be taken seriously. Don’t overlook their membership fees.
Simply put, a company operating without insurance covering its property, employees, and liabilities is begging for disaster. The costs of proper insurance should absolutely be figured in from day one. Shop around and haggle with insurers to get the best possible deals.
- Delayed Payments
Never assume a customer\client is going to pay on-time unless you require cash on the barrel. Having too many unpaid invoices stacked up can become a financial drain of its own, and often risks putting you in the red.
- Transaction Fees
How much are your banks, credit cards, and other financial services costing you? Many credit cards, for example, charge businesses up to 3% in fees. Such fees can add up to a major drain on your profits, but they’re easily overlooked.