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The Hidden Costs of Starting a Business

“There are only two things in a business that make money – innovation and marketing, everything else is cost” (Peter Drucker, author)

Running a business is never cheap and starting one up may be one of the most expensive things you ever do. According to the U.S. Small Business Administration, most microbusinesses cost around R60 000 just to get to the point where you are ready to start operating. Clearly, larger businesses with extensive infrastructure would cost much more. While it’s easy to plan for obvious production costs, office equipment, marketing and even taxes, the hidden costs we list below may come as something of a surprise.

  • Registration, licences and permits

    Business registration is a cost that is absolutely essential for all businesses. Just registering a business name will require a payment to the CIPC.

    Depending on your industry there may also be licences and permits necessary to manufacture or sell your products. This is particularly relevant in the manufacture and supply of foods. Restaurants, hotels and B&Bs may also need permits to offer specific services and any business that wants to make use of natural resources, such as fish, water, or land will undoubtedly also need to pay for government permission. Health clinics, spas, nightclubs and many more will also have to find money to meet permit requirements.

  • Business Insurance

    Not every business owner needs to take out insurance, but anyone with a business that deals with the public would be wise to at least cover their liabilities in that regard. If employees are going to operate onsite, employee liability insurance is also highly recommended. In addition to this you may need to insure key equipment, vehicles, and important and expensive stock items.

  • Shrinkage

    Shrinkage is any loss of inventory that occurs before it can be delivered to your customer. New business owners may not account for any loss whatsoever, but studies indicate that depending on the industry, shrinkage can account for up to 7% of turnover.

    Usually though, shrinkage will be in the region of 1% to 2% of turnover, which can add up.  These losses come from customer thefts, employee fraud, administrative errors and damage, and need to be controlled, but the truth is, some will always sneak through and have to be accounted for in any business calculations.

  • Delayed payments

    New business owners might develop their projections based on their sales always going to customers who pay for the products or services as soon as they are received. The reality of doing business is that this is extremely rare. Some large corporates may only pay on a 90-day cycle.

    Meanwhile, new stock must be purchased/developed and staff have to be paid. Taking loans to cover costs because of delays will result in interest payments, whereas monies held back to meet these payment requirements will mean that other investments or growth opportunities will have to be delayed. All of this incurs unexpected costs. It is therefore essential that you meet with your accountant to determine the most cost-effective way to meet your obligations and keep the company running.

  • Banking and credit card costs

    No matter which bank you use, their services do not come free. Whether it’s structured through monthly account fees, transaction charges or interest on credit cards, businesses will end up paying a significant portion of their income to their financial service providers. Every bank will structure these costs differently, so it’s important for a company to find the one that best suits their way of doing business.

  • Administrative costs

    Working for someone else, it’s hard to imagine just how much the everyday office costs to run. Everything from toilet paper to paper clips, and printer paper costs money. Even if you aren’t offering free coffee and tea to employees, you can still expect to pay for cleaning supplies, software registration fees and the electricity bill at the end of the month. Individually these items don’t cost a lot, but added together they will amount to a significant extra burden each year.

  • Market research

    Many business owners start their businesses based on their own knowledge and gut feel for their industries. This is generally a good starting point, but getting a company to thrive requires a solid knowledge of your market and your product’s key differentials. This takes market research, and this isn’t free.

    You do not necessarily have to hire an expensive consultancy to do the market research for you and can choose to instead do it in-house through emails and phone calls. Whichever way you go, however, it will take money, and time, both of which are valuable resources you may not have accounted for.

  • Hiring and training costs

    Entrepreneurs know of course that they will have to pay the staff they employ. They probably also know that each employee costs the company more than their simple salary. What they may not take into account is that hiring someone costs money and training them up to standard costs even more.

    Hiring someone may well require you to either contact an agency or pay to put adverts online. Then there is the process of vetting CVs, conducting interviews and ultimately bringing someone on board. All of this costs money as does the time, and equipment needed to train them for their position.

  • Graphic Design

    Building a successful company will also require you build a recognisable brand. This takes proper logo and website design alongside copywriting fees for working brand slogans, corporate values and web content. All of this costs money, but without it, you can’t expect to maximise your profits.

    In order to ensure you aren’t surprised by unanticipated business expenses, there is one other cost you should always budget for – an accountant. Your accountant will be able to help you make the crucial decisions that stretch your money as far as possible each month while ensuring you aren’t tripped up by these hidden costs.

Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.

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