Uncovering the Hidden Costs of Small Businesses

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Setting out to start your own business is ambitious and exciting. With ideas and dreams fuelling motivation, it’s easy to get enthusiastic about your new found freedom. After all, there is so much potential a new endeavour can bring. In order for a small business to develop and prosper, it needs to have strong financial planning.

With so many factors to take into account, it’s easy for small business owners to miscalculate the actual cost it takes to run a company. Not only is important to budget for your known costs, it is necessary to factor in a buffer for the unexpected costs the business might incur. There are a multitude of hidden costs that business owners may not consider.

Attending Conferences and Joining Industry Associations

Networking and meeting people in your industry is an important part of growing your new business. An effective way to do this is by attending trade conferences. These conferences create numerous opportunities to present you product, give and attend speeches, and learn about what’s topical and innovative in your industry.

However, these conferences can come at a hefty price tag. All attendees from your business will incur expenses for travel, accommodation, meals and conference tickets. Moreover, while your employees are at this conference, it is effectively lost time working at the office. If not budgeted for properly, the cost of the conference can come as a surprise to new business owners.

Industry associations are also an essential part of building relationships, building rapport and connecting with industry leaders and customers. However, joining fees for these types of business associations add up. If not factored into the overhead costs of a company, it will come as a shock to your budget.

Lengthy Payment Times

Many small businesses have to wait 90 days or more before they get paid from customers. This directly impacts their cash flow and makes it difficult for small businesses to stay afloat. When a customer purchases a product, the ordering cost to the business is far greater than what the customer actually pays. If the business has to wait 90 days for payment to come through, the actual ordering cost can grow quickly.

The awaited payment can cause the small business to incur fees and interest on loans they’ve taken out to maintain enough reserve cash during the 90 days. This may also cause businesses to make payments beyond their means, resulting in overdraft fees. Therefore the business should note the actual ordering cost of a product should factor in the hidden costs incurred over time if they have to wait 90 days. Conversely, it is reasonable to insist on shorter payment terms, such as 14 or 28 days windows.

Inventory Stock Shrinkage

When inventory stock decreases at some stage between delivery from the supplier and a customer buying the product it’s referred to as shrinkage. Inventory stock can go missing for a variety of reasons. When warehouse employees pack up shipments there can be errors in their allocation. This happens when they accidentally place too many items in a package. Additionally, inventory stock can get damaged. The company still incurs the cost even though it can’t sell it on. Unfortunately, theft is also a reason that shrinkage occurs and the company’s budget feels that loss.

When budget planning as a small business, make sure to take a closer look into your company’s activities to uncover where potential and unexpected costs could come from.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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