For many, it’s the dream. And for many, that dream has become a reality over the last few years, with statistics showing that start-ups are on the rise.
However, there is also a sour element to those statistics. Many of these businesses do not survive the test of time, with the failure rate seemingly growing.
While there are many reasons why this can happen, one way to add a layer of protection to your new company is to understand the Hidden Costs. The classic beer mat calculation can be helpful as you quickly check the viability of an idea. Still, as time progresses, you need to understand the hidden costs that can have a tremendous effect on the profitability of your business.
We’ll now take a look in detail at some of these costs through today’s post.
Employee Costs
This is one of the most prominent and largest costs that a business will have. Depending on the number of employees you have, you will need to factor in National Insurance contributions, PAYE, pension contributions and other benefits. Granted, not all small businesses will start out with employees, but there’s no going back once you make that decision. After all, you now have a responsibility to ensure that other people receive enough pay to live on.
In addition, you will also need to pay holiday pay, sick pay, and other forms of leave. Don’t underestimate how quickly these figures can add up for a small business.
Tax
Like with employee costs, tax is another unavoidable cost that all businesses must factor in. The amount you pay will depend on the company’s taxable profits, and there are a variety of different taxes that you will need to pay, including Corporation Tax, Income Tax, and VAT. While the latter can bring benefits in some regards, again, it’s important not to underestimate the costs that can be involved in it as well.
For a small business, Corporation Tax is another significant one to be aware of. This is a tax on a company’s profits and is currently set at 19%. The amount you pay will depend on your company’s profits, so it’s important to factor this into budgeting for the year.
Shrinkage
Shrinkage is a term used in business to describe the loss of stock through theft, damage, or other means. This can be a significant cost for businesses, especially those in the retail sector.
While there is no way to eliminate this cost completely, there are ways to reduce it. This includes proper stock control, security measures and staff training. Nevertheless, if we return to our beer mat calculations, shrinkage is one element that many new business owners forget. Unfortunately, if you don’t stay on top of it, it can come back to bite you and your profits significantly.
Payment Delays
Another cost that new business owners often overlook is the cost of Payment Delays. This can be caused by several factors, such as late payments from customers, slow payment processing or even fraud.
Whatever the cause, payment delays can be a significant drain on a company’s resources. Not only do you lose out on the money that is owed to you, but you also lose out on the opportunity cost of that money. In other words, you could be using that money to invest in the company or to pay for additional expenses, but instead, you’re waiting for it to come in.
This is arguably the most serious hidden cost out there and can lead to cash flow issues that tend to be such a problematic issue for some businesses. Even though your business seems to be performing well by regularly getting new contracts and work – it will all be for nothing if you’re not getting the cash in time.
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