Small business owners, especially new entrepreneurs, can often tend to underestimate expenses. When you’re running your own company, you’ll have to meet employee costs, spend money on marketing your product or service, as well as arrange to budget for rent, utilities, and insurance. In fact, the list of things that you have to pay for is practically endless. That’s why it’s essential to understand the true cost to own a business.
A business owner who spends some time on this issue and maintains a financial cushion is far more likely to succeed than one who is continually running out of cash.
But how can you keep expenses to a minimum while allocating adequate resources for activities that will help to grow your business? Is there any way to ensure that you don’t overspend?
In this post, we’ll examine the true cost to own a business, and also identify a few hidden expenses that some entrepreneurs forget about.
Understanding the True Cost to Own Your Business
The U.S. Small Business Administration (SBA), a government agency that provides support to entrepreneurs and small business owners, says that the first step in arriving at the true cost to own your business is to determine the category in which your company falls. Are you a brick and mortar firm, an online venture, or a service provider?
What’s your business type?
This categorization is important because it will help to provide you with an idea about your cost structure. For example, a brick and mortar firm could have to spend a significant amount on rent. An online business may need to spend on web hosting and a good domain name.
CaminoTip: Don’t underestimate domain name costs. While you may be able to get the one you want by spending a few hundred dollars, the best names can be prohibitively expensive. GoDaddy, a top internet domain registrar and web hosting company, points out that “CarInsurance.com” sold for $49.7 million, and “Hotels.com” cost the buyer $11 million.
Which are the costs that you should focus on? While each business is different, here is a list that would be relevant for most firms:
Common business costs
How can you minimize your business expenses? Pay attention to reducing your labor costs and your production costs. Take out time to calculate your cost of sales. You’ll know where to focus your cost reduction efforts after you complete this exercise.
Let’s examine the true cost to own a business more closely by taking an example. Consider the cost structure of a restaurant. What are the expenses involved in running a restaurant?
Cost structure of a successful restaurant
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There are various ways to boost your restaurant’s profitability. You can make a beginning by using the food cost formula. This can help to reduce your input costs. It is also advisable to carry out a menu audit and make adjustments in your pricing. Small changes can yield big results over time.
How the True Cost to Own a Business Varies Per Industry
The costs you will incur for setting up a business and running it will differ based on the industry in which you operate. Let’s look at a few sectors and review the major expenses in each:
According to RestaurantOWNER.com, a website that provides information to independent restaurants, the cost of starting a new restaurant varies from $175,000 to $750,500. These costs include construction expenses, kitchen and bar equipment, and preopening expenses.
Here’s a summary of the cost estimates for opening a restaurant:
Restaurant startup costs
The cost of setting up a business in the construction industry can vary widely. The amount you need would depend upon your proposed scale of operations and the number of employees you plan to hire. Would you buy the equipment you need or hire it? The former would be more economical in the long run. However, it would involve putting up a significant sum of money.
Here are some of the costs that you would have to budget for:
- Registration costs – you need to register your construction company to give it a distinct legal entity.
- Cost for licenses and permits – these will be issued by both federal and state agencies.
- Insurance expenses – you are likely to need general liability insurance as well as workers’ compensation insurance.
- Equipment costs – buying construction equipment can be expensive. Consider taking a small business loan if you require funds.
If you’re planning to start a retail store, make sure you have enough money to pay the rent. This is going to be one of your most significant costs.
Peerspace, an online marketplace for entrepreneurs looking for places to rent, points out that a mall could charge between $18 and $30 per square foot. The Mall of America in Bloomington, Minnesota, one of the largest in the world, has a base rent of $2,500 to $9,000 per month.
Some of the other costs that you would have to take into account are:
- Licenses and permits – here’s a quick guide from Camino Financial on business licenses and permits.
- Inventory costs – you don’t want customers to walk away because you don’t stock the size or color they need. If you’re short of cash to buy merchandise, consider raising money through inventory financing.
- Investment in technology – you’ll need a point of sale system or POS and other equipment, as well. Make your purchases carefully, as business technology can be expensive and you should buy only what you need.
Don’t Forget the Hidden Costs
When you are calculating the true cost to own your business, you should remember that it’s practically impossible to anticipate all the expenses you will have to bear. Many entrepreneurs underestimate the amount they will have to spend on their business.
Take the retail industry. If you’re a retailer, you must take inventory shrinkage into account. A survey carried out by the National Retail Federation in 2018, found that shrink costs are, on an average, 1.33% of sales. In dollar terms, that’s a total of $46.8 billion.
What are the reasons for this loss? They include employee theft, shoplifting, and fraud.
Source of inventory shrinkage (2018 average)
There are several hidden costs you need to consider when you are calculating the true cost to own a business. If you buy new equipment, you may need to hire an additional employee to operate it. Money would be required for an annual maintenance contract. Additional funds could be needed for repairs.
Small business owners who accept payment by credit card will have to bear credit card processing fees. These could be as much as 3%. It pays to shop around for the best credit card processing rates for your small business.
CaminoTip: Here’s a rule of thumb you should follow when you are calculating the true cost to own a business. Overestimate your expenses and underestimate your profits. This will help you to build a cash cushion and strengthen your company’s financial position.
How to Calculate the True Cost to Own Your Business
You can work out the true cost to own your business by completing this fillable PDF spreadsheet from the Small Business Administration.
Here are some tips to minimize your costs:
- When you have to acquire new equipment, decide what’s better, leasing, or buying? Sometimes leasing is the more economical option, while at other times, it makes sense to buy. Carry out a careful analysis before you arrive at a decision.
- Minimize your interest costs. You don’t want to pay more than is necessary for the funds you borrow. Contact Camino Financial for the best available rates and terms.
- Maintain a cash buffer. Remember that CASH IS KING. You must never let your business face a situation where you don’t have the money to meet your day-to-day expenses.
- Negotiate prices with your suppliers and vendors. Saving small sums consistently can help you accumulate the funds you need to expand your business.
The Bottom Line
Calculating the true cost to own your business can provide you with several benefits. You will understand how you are spending your money. It will be easier to think of ways to lower costs and get the most out of every dollar.
At Camino Financial, we endeavor to give small business owners the resources they need to improve financial performance and take their businesses to the next level. Our motto, “No business left behind,” drives us to provide entrepreneurs with information that can help to reduce costs and get the biggest bang for the buck.
We invite you to learn how you can do this by reading our posts on How To Reduce Your Business Fixed Expenses and How To Reduce Your Business Variable Expenses.