Starting and operating a business is exciting, rewarding and – if done successfully – highly profitable. But the hidden costs of running a business can sometimes put excessive pressure on business owners, operations and cash flow.
If you’re considering founding a new business or looking to financially streamline your current organisation, it’s critical that you understand what hidden costs you may or may not be taking into due consideration.
What do we mean by ‘hidden costs’?
Understandably, business owners often focus on revenue generation and profit margins, sometimes to the detriment of focusing on other items, such as costs – both apparent and hidden.
Why is this the case? Revenue refers to the total income a company generates through sales of goods and services but does not take into account the costs associated with bringing in that revenue. Profit margin is the percentage of revenue representing a business’s profit after all the costs are deducted.
The challenge here comes in identifying not just how to increase revenue but how to increase profit margin. By understanding and reducing the hidden costs, i.e., the costs associated with operation one isn’t consciously aware of, you can increase the business’s profits without actually having to increase revenue as well.
In other words, not understanding the hidden costs of running a business can really impact a company’s bottom line.
What are the hidden costs of running a business?
Compliance Costs
Running a business in Australia requires a strong understanding of the local, state and federal regulations and compliance requirements for the particular industry in which you are operating. Whether it’s a construction license, medical industry accreditation or tobacco taxes, the cost of legal compliance can be impactful.
Employee Benefits
The cost of payroll and payroll tax is not a hidden cost for the majority of business owners but the implications of employee benefits often are. Superannuation may be the largest hidden cost, but paid leave entitlements, bonuses, and other labour laws governing things like overtime and weekend/public holiday rates are important liabilities to be aware of.
Maintenance and Repairs
The cost of assets such as equipment and machinery is another example of an expense business owners are likely aware of and have factored into considerations. However, despite ongoing maintenance, servicing and repairs being often forgotten about, they are critical for dealing with general wear and tear as well as damage. Not to mention the repair and maintenance costs associated with the physical space, office, warehouse or factory in which your business operates and in accordance with Australian building codes.
Utilities and Overhead
We’ve included utilities and overhead costs like internet, electricity and phone services, not because they’re hidden in the sense that business owners don’t know about them, but because they are often not factored adequately in financial projections. Overhead costs can accumulate quickly and affect profitability significantly.
Marketing Costs
Marketing and advertising campaigns are costly endeavours but are nevertheless often essential. However, many forms of marketing are not geared towards immediate returns. The hidden cost of marketing is often in the impact on short term cash flow as you invest in longer term returns.
Inventory Holding Costs
Inventory holding costs such as storage, insurance, and transport can eat into a company’s profits if they are not taken into consideration. For perishable goods this cost can be even more critical and impactful.
Payment Processing Fees
In today’s modern world there are a plethora of different payment processing platforms. Whether it’s a simple credit card transaction or a buy-now-pay-later system, there are often processing fees that need to be thought out and factored into pricing.
Employee Turnover
Employee turnover is costly to just about all businesses. Recruitment and training requires an investment of time, money and energy. Unfortunately, many businesses fail to consider and calculate the cost of employee turnover when considering overall labour expenses.
Technology
Investing in the right software and technology is no longer a voluntary business cost in today’s competitive economy. Without the right systems to underscore your operations, your business won’t be competitive in the market.
Goods and Services Tax
In Australia, the goods and services tax (GST) is another example of a potentially hidden cost that needs to be taken into consideration. While GST does not apply to all businesses, unless you correctly factor this into your price calculations you could find your business under financial strain. You can find out more information about GST on the Australian Taxation Office’s website.
Consultation Fees
Professional advice can be invaluable for many businesses. Whether it’s legal advice or consultation/advisory fees, these hidden costs can sneak up on an unsuspecting business owner when a particular unforeseen event plays out in the business or marketplace.
Cybersecurity
Technology is progressing at a faster rate than ever before and not just in operational software systems. Data security and cybersecurity is becoming more and more important for all businesses. Investing in the right IT security is not just about protecting your customers or clients, it is also an important requirement that’s becoming more and more robust in Australian privacy law.
Business Travel
For many business owners, their business requires a certain amount of travel. This could be to arrange client meetings or to meet with potential manufacturers and suppliers. If you run a business with offices in different cities or states, you’ll likely need to travel even more. This hidden cost of day-to-day operations may not seem extensive as a one off but can accumulate quickly.
Solve the Hidden Costs of Business with ScotPac
ScotPac is the largest non-bank lender in Australia and New Zealand for a reason: Our specialists work directly with our clients to find fast, accessible, and tailored solutions for their cash flow needs. If you’d like to find out more about how we can help you and your business deal with both the known and hidden costs of running a business, make sure to reach out to us today.