Preparing Yourself for the Unexpected Costs of Doing Business
Thursday, May 1, 2014
You don’t need to be a financial wizard to run a business, but you do need an element of financial savvy.
At the very least, you must know how to plan and properly manage money on a day-to-day basis, because if you don’t, you'll never have a true picture of your business’ finances, and, should anything unexpected crop up, you could be in dire straits, especially if your cash flow is already strained.
By turning your mind to the various small business costs that are often overlooked or underestimated by many startups and entrepreneurs, you can save much worry, and, in the long run, perhaps even your business.
Overestimating sales and underestimating costs
These are two of the most general mistakes made by most business owners at some time or the other.
Like a marriage, you don’t go into business expecting it to end badly, or at all. You are excited and optimistic about your business’ future prospects, and that’s fine, as long as you’re also realistic.
Often your sales are not as high as you may have projected and your costs are more than you budgeted for.
It is better to be cautious and conservative in your estimates early-on. That way, if you hit your target or do better than planned, you have a surplus, and if not, at least you'ill be prepared and able to cope.
Late returns and penalties
Even the smallest of businesses have bills to pay, and not paying them on time is going to cost you, even if you think you've budgeted for it. It's better to ensure that you stay on top of your regular outgoings.
If not, at the end of every month, you’re going to find yourself drowning in bills and also late fees. You only have to forget to pay your ASIC registration or your credit card bill and you’ll find the late fees starting to mount.
If you don’t have the money to pay these bills, call the relevant body and make alternative payments. Most of them will happily help you out, as long as they know what is going on, so plan ahead and pay your bills on time.
Every cent you pay in late fees is money that could be put back into your business, rather than someone else’s.
Licences, permits and red tape
In most cases you will need a licence from your local authority to operate a business.
Requirements vary from business to business and some businesses face stricter rules and regulations than others.
For example, if you plan to open a restaurant you will have to ensure your facility complies with required food handling standards, perhaps liquor licencing laws are applicable and your staff may require annual training.
Be sure you know what your licencing and other legal requirements are before taking the plunge, especially those which affect you long-term, or you could find yourself unexpectedly paying for various pieces to patch things up at a time when you simply cannot afford it.
Banking and international finance costs
Most people underestimate this, especially when they deal in international transactions, which so many online business do daily.
International payments are often made through third-party payment gateways such as PayPal. Given PayPal charges around 3 per cent for every transaction, you need to know that of the $1000 you are expecting to receive, $30 of that will go in fees.
A solution may be go 50/50 with the client on the fees, but whatever you do, just being aware of the fees will ensure you won’t get any nasty surprises.
Similarly, you’ll likely pay monthly bank account fees as well, so don't forget to factor all those in to your outgoings also. It may only be a few dollars every month, but it still has to be paid and if you don’t factor it in, you won't have a clear picture of what you can actually spend.
Currency exchange rates and currency conversion rates
We already know that in today’s connected world more and more small businesses transact internationally.
Whether you need to pay someone internationally or you need to receive an international payment (as mentioned above) or you will be travelling abroad, you will have to deal with exchange rates and possible currency conversion fees.
If the exchange rate moves in your favour, you’re fine but if it goes the other way, you could lose a lot of money, so budget accordingly.
If you travel abroad often, you should consider keeping funds in an international account to avoid regular currency conversion fees. And don’t forget travel insurance, because if things go wrong overseas, the resulting costs could mount to thousands, especially if any hospitalisation is required.
Payment delays and lead times
Unfortunately customers won’t always pay you on time and this can impact your cash flow drastically.
Then, depending on how you get paid, it could be a number of days before the funds arrive up in your account. This could mean you may have to keep reserve funds or arrange for an overdraft facility with your bank.
When you use an overdraft or any other form of finance there are costs involved so make sure you also budget for these.
Expected the unexpected
Things go wrong, accidents happen, disasters occur. Misfortune can come in many forms, from a car accident to a flood, fire, or illness.
This is where insurance and other forms of financial protection come into play.
Althought it may seem like a superfluous cost, you must ensure you have adequate insurance to protect your financial interests when the unthinkable happens; your business could depend on it.
And, same as the previous points, you need then to budget for your insurance premiums and any deductibles.
Today every small business needs a website, and gone are the days when you, as an amateur, could just knock together some html or throw some content onto a page.
Modern day internet users are more sophisticated and if your website is not up to scratch or looks unprofessional, they’ll head elsewhere.
These days, website costs extend beyond simply developing a site. You need to budget for annual domain registration and renewals costs, hosting costs, SEO, perhaps even digital marketing costs like AdWords and social media campaigns.
Make sure you budget as accurately as possible for all your digital and online costs and be aware as to when renewals are due. If you forget to pay your domain renewal, you could use your all-important domain name. Not only will you lose the website associated with it, you could lose your entire online presence and brand.
It sounds obvious, but it's a setup cost that some small businesses completely forget about. Are you planning to have a premises? Odds are, you'll need internet there, and in order to connect to the internet you need cabling and wiring fit for a stable and permanent internet connection.
You'll of course need a connection plan provided by an Internet Service Provider (ISP). Most ISPs have business plans, different from their personal ones, so this is something you'll have to weigh up the benefits of, in your purchase.
In addition to the above, you may also need to connect to the internet outside of your main network.
This could be when you are on the road doing business and to use your mobile or tablet to connect.
Direct mobile connections are more expensive than your permanent connection so keep these cost requirements in mind, and check with your ISP whether their business plans bundle in mobile internet, too.
Taxes and other liabilities
It is great when the money comes in and you start making profits. However, not all that money belongs to you.
Apart from normal business expenses you will need to pay your share of taxes and related fees to the relevant authorities.
You need to budget for your taxes, be they your standards business tax, sales tax, payroll tax and/or GST.
This is a nasty one. Hidden costs can come in many forms depending on your line of business. Though some are legitimate but not immediately obvious, others are plain nasty and designed for you never to know about them until it’s too late.
Look for fees hidden in fine print, introductory teasers, inferior quality products, excess data charges, insurance gaps, professional fees and more. Especially if you're entering into business for the first time. Also, if you’re paying more for something this year than you did last year, ask why.
No business owner can be prepared for every single financial hit they will experience in a year, but the ones who have done their due diligence and are at least aware of what might come are usually the ones whose businesses are still standing after 18 months.
Take a leaf from the books of the strong, smart, and successful, and be prepared.
Sam's excellent piece is, as you well know, just the tip of the iceberg. Want to know more about some of the topics mentioned above? Check out some of the other recent business startup articles on the blog, and, as always, hit us up in the comments section below with your suggestions as to what else you'd like to see our team write about. - Ed.