“Rule No. 1: Never lose money; Rule No. 2: Don’t forget Rule No. 1.” – Warren Buffet, CEO of Berkshire Hathaway
Buffet offers an important rule. But how realistic is it when it comes to starting your business? Probably not very, but getting your finances correct when first starting out is hugely important.
To get up and running, you need to make sure you have a clear pricing strategy, and even then, you can still get burned. Not only do you have to take into account sticker shock your clients might be dealing with (see: Netflix), you also have to be aware of all the hidden costs associated with your business.
Sure, you have planned for rent, payroll, and the costs associated with formation, but if you are not prepared for the unexpected you might find yourself caught off guard.
“In fact, “death by a thousand extra costs, which cause drag on [your] business so [you] fail to reach a point of sustainable growth,” is one of the biggest reasons startups fail before even, well, starting up,” says Nathan McDonald, Co-Founder and President of Keiretsu Forum.
We reached out to other business leaders like McDonald to see how you can make sure you know the hidden costs of your startup to help you avoid sticker shock.
“Permits, licenses, and dues are a huge up-front cost that you should be expecting right out of the gate, but you might be surprised when you are hit with renewal fees,” says Rachel Jones, Head of PR at Hope Health. “Very rarely are these one-time expenses. You need to be aware of how often you will need to renew permits and licenses and how much it is going to cost you each time. You might think you have everything taken care of then, all of a sudden, you get a renewal in the mail that puts you back a couple grand.”
You can think of these like your yearly credit card fees. Nothing is worse than spending a bunch on your credit card and having a plan to pay it off when, out of nowhere, you are hit with your yearly fee. It’s an awful feeling that can make your debt pile up if you are not careful.
“Membership dues should also be factored into your expenses. You will likely have joined a few when first starting out in order to make some connections. They can offer great exposure, but they come with a price tag,” says Will Watters, Co-Founder & Creative Director of Western Rise.
If you are not convinced, consider that some permits can run you over $15,000. Forgetting to factor in even one can quickly leave you squashed beneath debt.
“Unless you are independently wealthy, chances are you will be needing a loan to finance your startup,” notes Kashish Gupta, Founder and CEO of Hightouch. “You need to be well aware of the hidden costs surrounding your loan and the interest on it. If you have bad credit right now, you are setting yourself up for failure in the long run.”
You will likely find yourself taking out a small business loan from a bank or some other type of lender. These are great ways to deal with the costs of getting off the ground. However, if you have never had a business before, the loan is going to be structured based on your personal finances.
“This is great if you have outstanding credit, if not, the terms you receive on the loan are going to be bad and you might not even get approved for a loan to begin with,” says Amaury Kosman, CEO of Circular.
“If you start off with bad loan terms, you are going to be spending quite a bit to pay them off. This is hard to do when you are just starting out and are having trouble finding your market and are in the process of figuring everything out. Over the course of your loan’s terms, you will find that the interest adds up fast and that can make it difficult to make payments on time. It’s a slippery slope.”
You know that hiring is going to cost you. Every person you add to your team is a business expense. Salaries, medical insurance, training. It all comes out of your profits. This should come as no surprise.
“What might catch you off guard, however, is just how expensive your employees are when you don’t invest in them properly,” says Jorge Vivar, Creative Director of mode. “If you don’t provide your talent with a great place to work, you are going to start losing all the people you worked so hard to attract in the first place.”
It’s common knowledge that it costs more to train a new employee than it does to keep the one you already have. To help avoid turnover, make sure that you are offering perks and benefits that will keep top talent around for years to come.
“The perks you offer don’t need to burn a hole in your wallet. They can be something super simple that will cost you nothing. Letting people have flexible schedules and having a laid-back workplace will do wonders,” adds Joshua Chin, CEO of Chronos Agency.
No, not that thing that George Costanza experienced in the Hamptons, shrinkage is the loss of inventory attributed to any number of factors including shoplifting, admin errors, fraud, damage, cashier error, etc. Essentially, any loss of inventory.
It’s an easy thing to overlook, but shrinkage costs businesses about 1.4% of their total sales a year. Don’t let this often-overlooked expense shock you when you go into business. Be prepared.
“Yes, shrinkage is going to occur; it’s inevitable. But you can mitigate your losses by planning for it and implementing an inventory management system that will provide data on everything you sell,” suggests Jean Gregoire, Founder & CEO of Lovebox.
Being aware of shrinkage is the best way to stay ahead of it and make sure it doesn’t have too much of a negative impact on your finances.
Insurance is an incredibly important part of your business. At first, you might not need much of it, but that will change as your brand grows and your needs change. Expect to pay for things like small, workers comp, liability, errors and omissions, business insurance, property insurance, and more.
The amount you spend will vary based on a number of different factors, so don’t be surprised when the costs stack up. “You might find yourself spending thousands on a policy each year. If you are on an already tight budget, that can be quite a hit,” warns Karim Hachem, VP of eCommerce at Maxine.
“Insurance is going to be the most important part of your spending budget, but that doesn’t mean that you can’t save some money on it. You would be surprised to find out how much you can negotiate with insurance providers. Show them that you are a good customer by being on time and paying upfront and they won’t want to lose you as a customer. See if you can get any discounts and be sure to review the terms of your policy regularly to make sure you are still getting the coverage you need at the right price.”
Death and taxes, right? Two things we cannot escape. Your business is no different. Michael Ayjian, Co-Founder & Executive Producer at 7 Wonders Cinema says, “It can be easy to forget taxes when you are used to having them taken care of at your other jobs, right? You know what you owe, but you aren’t thinking about what the company is paying.”
Taxes are deducted from your paycheck by payroll before it gets to your account and your company might have even covered some of your costs. Ayjian adds, “No matter how much money your company is generating in revenue, you are going to get hit square in the chest by a self-employment tax if you aren’t ready for it. Make sure to squirrel some money so you aren’t blindsided and can take the hit like a champ come tax season.”
Just In Case
These are just a handful of the hidden costs that you might encounter when your business gets up and running. There are many more that even the best business person can forget about. To help keep you from drowning, Woody Sears, Founder of HearHere offers his best advice.
“There is no way to account for every cost you are going to face as you get your company off the ground. The best thing I can recommend to anyone starting out is to have 20% of your revenue set aside for emergencies. It will save you in a pinch.”