Hidden costs for small businesses and where to find them
When you’re scaling up an enterprise, your business plan is your roadmap. It lists the costs of things like stock, premises and employees. You work out how you will cover the costs and turn a profit, with a strategy to boost your income as the organisation becomes more successful.
However, this reliable roadmap can prove less reassuring when unexpected costs show up on the horizon. In the delicate early stages of building a business, the last thing you want is to find financial obstacles blocking your way. It’s best to know about the hidden costs facing small businesses, so you can plan for how to dodge or meet them.
The hidden costs you might face will depend on the nature of your business. Let’s look at some of the possibilities.
- Low productivity
If you achieve a given result with three employees, will tripling your staff mean profits rise at least threefold? Unfortunately not. Productivity is a complicated thing and it can be difficult to predict. According to the Leesman Index, only 54% of employees say their workplace enables them to work productively. Technical problems, poor management, low morale and bad strategy can all sap productivity.
- Staff turnover
Replacing an employee can be expensive. There’s the downtime as the outgoing employee approaches their leaving date, fees for recruitment and marketing, time taken up by interviews plus allowing the new starter a few months to find their feet. Unfortunately, you can never predict when a worker will leave, so it’s best to be prepared.
All modern businesses need an online presence plus a network and computer system to manage everyday workload. When you’re starting out, a laptop and a basic website might suffice but as the business grows you will need to increase your budget. Cybersecurity, data back-ups and cloud services can add to the bill considerably.
- Patents and intellectual property
Intellectual property is an area where small businesses take a gamble: they decide to save on legal fees in the hope no one will copy them. This can mean that another business simply steals the brand, product or process that took years of hard work to perfect, and you have no standing to challenge them. Applying for a patent costs a few hundred pounds, which is usually money well spent.
- Unpaid invoices
This is the bugbear of all small businesses. Your invoices ask for payment within 30 days, but six months down the line you are still waiting for the money to arrive. Around 12% of UK SMEs wait 90 days or more for payment, which can choke cash flow and cause problems with your own credit rating. Careful vetting of your trading partners is one way to protect yourself from this risk.
There are some types of insurance that you are obliged to take out, such as employer’s liability insurance if you have employees, or public liability insurance if your premises are open to visitors. Insurance is an invaluable tool to protect your business, but it’s best to be clear at the outset what you need and how much it will cost, so you can factor this into your plans. You might consider policies for product liability, professional indemnity, credit risk, cybersecurity and a host of other areas. Taking out a bundled policy to cover all of your needs will cost less than adding policies as you go along.
- Accounting and compliance
The UK tax system costs business around £10bn in hidden costs each year, with most of the burden resting on SMEs. The average cost per business is £4,376 to ensure compliance with regulation. This work can also take up around two hours per week for small businesses; time which could be spent on more profitable activity. As your business grows, your financial affairs will become more complex and you are likely to need professional help to keep your books in order.
- International bank charges
Large businesses have the resource to identify the cheapest ways of transferring money across borders, but SMEs generally just pay the fees levied by banks. Each year UK SMEs make around £700bn in international payments, paying higher foreign exchange rates than is necessary. Around 80% of small and medium firms say they don’t know the true cost of foreign exchange fees, which is a good indicator that they are not getting good value from their banks.
Could an unexpected bill threaten your business’ growth prospects? Why not talk to Stride Direct about how insurance can help protect your enterprise against risks?