Small and medium sized businesses are the heartbeat of any economy, especially in the developed world. Approximately 99.9% of all private sector businesses in the US would fit within this category, for example, with a total of 33.2 million small businesses currently operating across America.
Incredibly, small businesses in the US have added more than 12.9 million jobs to the workforce in the last 25 years, while this trend is largely reflected throughout the western world.
However, there are understated, and in some cases even hidden, costs of operating a small business, regardless of which vertical you’re active in. At the same time, small businesses lack the huge cash resources of large corporations, so profit margins are more easily squeezed over time.
In this post, I’m going to address some of the most easily overlooked costs of running a small business, while asking why they’re so important from a commercial perspective.
#1. Equipment, Maintenance and Upgrades
Even when dealing with the equipment that’s central to delivering your products or service, there are procurement costs that are all too easy to underestimate. Then there’s the cost of fulfilling non-strategic obligations and responsibilities, with those pertaining to health and safety and similar entities easy to overlook.
For example, all US businesses are mandated to install fire safety supplies at their premises, whether they operate a commercial office space or construction site. This includes water-based fire extinguishers, which must be made available throughout the site while remaining functional and accessible at all times.
Factoring this type of mandatory but non-strategic cost is crucial, as the failure to do so may ultimately endanger your safety and that of your employees. At the same time, it can cause non-compliance issues and cost significant sums of cash in the long-term, so it’s worth calculating these costs and factoring them in proactively when budgeting.
It’s also important to factor in the cost of maintaining and upgrading equipment, as this can also catch businesses unawares and lead to poor performance over time.
#2. Labor and Employee Benefits
While the majority of small businesses don’t employ anyone, such entities can boast a labour force that includes up to 500 people. Regardless, if you do employ staff members, these individuals are highly valuable and play a key role in making your business operational.
However, they also incur significant costs, while failing to invest properly in the remuneration, wellbeing and development of your employees can impact negatively on staff turnover.
This, in turn, can increase business expenses considerably over time, as it costs approximately two-times an employee’s salary to replace them in the labour force. If you scale such costs up, small businesses may see their resources stretched during an already challenging economic climate.
High staff turnover and inadequate benefits packages can also make it difficult to hire top talent in the future, so it’s crucial that you make a proactive investment in employees if you’re to reduce long-term costs and challenges while driving commercial growth.
If your small business is product-oriented, you’ll also factor in the costs associated with so-called “shrinkage”. This refers to a loss of inventory at some point in time between a product’s procurement and its sale to the customers, with Fortune reporting that retail shrinkage cost US brands around 1.4% of their total sales last year (or a cumulative $32 billion).
While nobody plans to lose inventory, this is evitable, particularly when handling large amounts of stock at any given time. Even if your small business looks to minimise its stock holding, you must still account for shrinkage in the form of short shipments, picking errors and unexpected damage.
Of course, some small businesses can struggle with the impact that shrinkage has on their margin, so it’s important to take steps to tackle this where possible. One option is to introduce a comprehensive inventory management system that leverages barcodes, scanners and similar technology, which require an initial cost to install but can drive long-term savings.
It may also be worth considering your business model, as dropshipping enables smaller businesses to trade without requiring them to hold stock at all. With this model, you’ll have products directly to the customer, while realising the difference between wholesale and retail prices as your profit.
However, this also means that dropshipping typically relies on high sales volumes for you to generate enough profit, so be sure to keep this in mind before committing one way or another.