Starting and managing a small business takes a fair amount of money. There are plenty of expenses you’ve already planned for—buying equipment, employing staff, getting an office space, and buying inventory. But no matter how well you plan, there will always be some hidden costs and necessary expenses that weren’t on your radar.
Learning about some of these obscure expenses will help lessen the shock, ensure you’ve got the money to pay them, and build everything you need into your profit margins and pricing.
We’ll cover some of the most common hidden costs and give you tips on how to bring them down and keep your business finances healthy.
Business Startup and Compliance Costs
These are the expenses you will need to pay to get your business up and running, specifically if you’re starting up an LLC or Corporation.
Hidden business startup costs include:
- A one-off fee you pay to the business formation agency in your state to start your business.
- A one-off fee you pay for having an accountant, lawyer, or business formation service create and file your startup paperwork.
- An annual fee for a “Registered Agent” service that can receive legal documents and correspondence on your behalf.
- An annual or bi-annual fee for filing a report with your business formation agency.
- Annual fees for licenses and permits that you will need to operate.
How to Reduce Startup and Compliance Costs
- Look for a low-priced, online business formation service as they can take care of straightforward company formations without needing to pay for other professional services.
- Explore your Registered Agent options as many business formation companies also offer this service at a fairly low cost. If you’re only in one location, you can act as your own Registered Agent.
- Understand the frequency, deadlines, and requirements for filing ongoing business reports.
- Research the ongoing licenses and permits you’ll need to pay to operate.
Credit and Debit Card Processing Costs
Card processing services will charge you a fee for taking payment via a credit or debit card. Hidden card payment costs include:
- A percentage amount of the overall transaction value, normally between 2.9% and 3.5%.
- A fixed fee added to each transaction, normally around $0.30.
- Varying fees for chargebacks and refunds.
- Foreign currency exchange fees.
How to Reduce Credit and Debit Card Processing Costs
- Offer alternative methods of payment like direct bank transfers or checks.
- For high volumes of transactions, see if you can get a bulk discount on your processing fees.
- Carefully review the terms, conditions, and fees in your card processing agreement.
- Look for alternative card payment services that charge lower fees, although 2.9% + $0.30 is considered the industry standard price.
Customer Service and Returns Costs
Customer service and support costs come from the overhead of dealing with issues and returns, together with maintaining customer satisfaction. Hidden customer costs include:
- Overhead for employing customer service agents or doing the support work yourself.
- Payment to have faulty items shipped back to you or a warehouse.
- Logistics costs to have replacements sent to customers.
- Costs for identifying and resolving the faults that lead to customer issues.
- Costs associated with refunds, credit notes, or goodwill gestures.
How to Reduce Customer Service Costs
- Compare carriers and logistics providers to find the lowest prices for shipping and returning items.
- Check that all your packaging and distribution processes ensure the quality of the item when it arrives.
- Automate customer service by providing knowledge bases, support articles, and chatbots so customers can resolve issues on their own.
Re-Keying Data and Communications Costs
These costs are part of the “Time is Money” approach. The more time you spend on low-value tasks and administration, the less time you have to pursue money-making opportunities.
Hidden data and communications costs include:
- Manually re-entering data multiple times into different systems, for example, customer details into your CRM software and your invoicing system.
- Having to type out detailed replies to common messages or questions over email and through other channels.
- Remembering to follow up on updates and other communications.
How to Reduce Data and Communications Costs
- Look into whether the software and systems you use can integrate with each other to copy and transfer data. Many applications will have this functionality built-in, and for others, you can use a service like IFTTT or Zapier.
- Create templates in your email or other communications software so you can click on a canned response to have pre-written replies to common questions and requests.
- Use “to-do list” software with automatic reminders to prompt you to follow-up on tasks.
Tax and Accounting Costs
Tax and accounting costs are likely to be the single biggest expense your business has after salaries. It’s important to understand the types of taxes you will have to pay, and how an accountant can help. Tax and accounting costs include:
- Self-employment tax that you pay on all of your business profits, at a rate of 15.3%.
- Federal income tax that you pay on business profits, according to your tax band.
- State income tax that you pay on business profits, depending on the state you live in.
- Sales tax that you pay when selling taxable goods or services.
- Estimated tax payments that you will need to make during the year to avoid interest and penalties.
- Bookkeeping and accounting costs to prepare, review, and file your tax returns.
How to Reduce Tax and Accounting Costs
- Find a good accountant who can help you claim all the deductions and expenses you’re entitled to.
- Save enough money each month to pay your estimated taxes to the IRS and your state’s Department of Revenue four times a year, so you avoid late payment penalties. A good rule of thumb is to put aside a third of your business profits.
- Keep excellent bookkeeping records and receipts and reconcile your bank accounts on a monthly basis. This will reduce the amount of work an accountant has to do and will keep their fees down.
Interest Charges and Fees on Loans and Credit Cards
It’s easy to overlook the interest charges you’re paying, and they can add up quickly. Whenever you borrow money you will need to pay interest, and these fees come from:
- The amount of outstanding capital that needs to be repaid, together with compounded interest on what you currently owe.
- Fixed or percentage-based fees for setting up a loan in the first place, or taking advantage of certain loan products.
- Ongoing interest charges from credit cards, especially if you’re only making a minimum payment each month.
How to Reduce Loan Charges and Fees
- Work on boosting your personal and business credit scores, as higher scores can get you more favorable repayment terms.
- Seek out alternative lenders who may be able to move you to lower interest rates.
- Get a “Debt Schedule” in place so you know exactly how much you’re paying and when it’s due.
- Try to pay off your higher-interest loans and credit cards more quickly to reduce outstanding interest.
The areas listed above are a great starting point for reducing your small business expenses. But keep in mind that hidden costs are unique to each business, and may include additional areas like insurance premiums, employee benefits, equipment maintenance, or inventory shrinkage. Getting insight into all of your expenses, profits, and losses will help you categorize every expense, both hidden and obvious, so you can work to reduce them.