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Hidden Costs Of Starting And Running A Business

Hidden Costs of Starting and Running a Business

Amrusha Chati

Amrusha Chati

29 August 20234 min read

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Hidden costs of starting and running a business

Launching your business is an exciting process. But it also brings a host of challenges, from finding the right co-founder to finding a unique proposition. But a lesser-known challenge is the hidden costs of starting and running a business.

One of the biggest challenges is money. Getting your capital in place through a small business loan, investors, or your own funds is a critical and difficult process. Once you secure the funds to start a business, sticking to a budget for all your business costs is a challenge, too.

But one thing that can seriously derail this process is hidden costs. These are costs that business owners often need to be made aware of. Small businesses usually have a tight budget, so these unexpected costs can be a big shock.

Here are some of the hidden costs of starting and running a business that you should include in your startup costs.

1. Hidden taxes

Most business owners have an estimate for the taxes they might incur, but usually, that estimate could be more accurate. That's because your business might qualify for multiple federal, state, and local taxes, and it's hard to keep track of each. 

State and local taxes also vary from place to place, further complicating things. For instance, Ohio has a 5.75% state sales tax, while the sales tax in California is 7.25%.

When launching the business, you may need to pay all the taxes or penalties if you miss any. Alternatively, you could get a professional to help you, but that's going to be a cost as well. As your business expands to new areas or products, you'll need to keep track of any new taxes this may incur and budget for those accordingly.

2. Business insurance 

Even business owners with excellent strategic thinking skills can often downplay the need for business insurance in the early stages of starting a business. There's a tendency to think you're too small and'll get to it later.

But in fact, you're vulnerable from the very first day. For businesses that deal in physical products, theft, natural disasters, litigation, or other unforeseen circumstances, all present risk factors that can disrupt your business. 

If your business is online, you need insurance against cyberattacks, given that small businesses account for 43% of cyber attacks annually.

As your business grows over time, you'll also need various other types of insurance policies. 

These include things like: 

  • general small business insurance
  • liability insurance
  • errors and omissions insurance
  • workers' compensation insurance
  • health insurance
  • property insurance
  • cyber insurance 

Eventually, the insurance premiums and interest payments can add up to significant amounts.

3. Technology and equipment costs

Even if your business is not very technology-intensive, almost all functions require basic equipment and spending on digital media.

Technology is a broad category under which you will have various tech expenses, such as creating and running a website, setting up back-end and information systems, and buying hardware such as computers, laptops, and routers.

Even if yours isn't an online business, your other business tasks will also require some investment in technology. You'll likely need to pay for premium or paid versions of apps for payroll management, employee onboarding, client management, employee expenses, cash flow management, workflow optimization, accounting software, and SEO.

While it's cheaper to use these than to build in-house teams for each, they can rack up to a sizable chunk of monthly or annual payments, in addition to smaller equipment costs.

Starting a new business means applying for countless permits, licenses, and registrations. To protect your business, you must protect everything from your physical assets to your intellectual property. If your business is built around a product or service, you'll need to apply for patents and trademarks to ensure legal protection for these.

This is why legal fees are very important when you are calculating your startup costs. As a small business owner, you're liable for any lapse, so getting some professional services for this part might be a good idea.

Additionally, a lawyer can help you decide the best legal structure for your business (e.g., a limited liability company) and deal with contracts and agreements.

While it's expensive, consider it an investment and plan for it in advance to avoid paying for costly litigation later.

5. Shrinkage

This is one that only some entrepreneurs are aware of. But especially for companies that sell physical products, the risk of shrinkage is high and costs retailers more than $46 billion annually in the USA alone.

Shrinkage is the difference between recorded inventory on a company's balance sheet and its actual inventory. This can be caused by factors such as:

  • employee theft
  • shoplifting
  • administrative error
  • vendor fraud
  • damage
  • cashier error

While it's nearly impossible to avoid shrinkage altogether, it's possible to be proactive to mitigate it enough that it doesn't negatively impact your company's bottom line. Being prepared for such losses from the beginning can help you avoid confusion, panic, and losses in such incidents.

Small business owners have to manage many moving parts, which can be difficult. But by preparing for these hidden costs, you can pre-empt many unexpected expenses and potential threats to your business and even save money in the process.

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Amrusha is a versatile professional with over 12 years of experience in journalism, broadcast news production, and media consulting. Her impressive career includes collaborating extensively with prominent global enterprises. She garnered recognition for her exceptional work in producing acclaimed shows for Bloomberg, a renowned business news network. Notably, these shows have been incorporated into the esteemed curriculum of Harvard Business School. Amrusha's expertise also encompassed a 4-year tenure as a consultant at Omidyar Network, a leading global impact investing firm. In addition, she played a pivotal role in the launch and content strategy management of the startup Live History India.