Before you decide to open your business, you will want to read this article to learn about the top operating expenses you need to consider first. Running a business is not just about offering a quality good or service, as certain things must be done to ensure a business can function optimally on a daily basis.
After picking out the best spot for your brick and mortar business, or considering setting up shop online, you have to factor in your operating expenses before fully committing to your venture.
Running a successful business is not solely founded on having a great idea for a good or service to meet the needs of customers. Being prepared by budgeting for daily, weekly, and monthly expenditures to keep your business running smoothly from quarter to quarter is necessary for success.
Whether you are a small or midsize level business, you need to know the cost of your operating expenses, in addition to your projected value and recurring income. If you want to survive in business, thoroughly investigating and understanding the critical functions that keep your business in the black is essential.
Being prepared for various operating expenses is necessary because there are fluctuating factors that can impact profitability, income, and profit from customer transactions, and even changes needed because of human capital and inventory. Beyond staying flexible to accommodate supply and demand, having balanced accounts to support daily business functions is paramount.
Do a checklist and consider whether you have enough financial security to cover the following.
- Have you considered how much coverage your insurance policy offers to protect your business?
- Do you have a trusted accountant and tax advisor on file to help improve write-off s and reduce costs?
- Is the amount of rent needed to cover your business location a drain on profitability?
Be proactive and carefully think about how to handle problems that can pop up during business operation, and have working solutions that can be implemented to mitigate risk and increase stability. Being prepared for a minimum of one projected year of business operation can help you move forward with greater confidence.
Cost Of Rent
When choosing where to set up a business, the cost of rent is going to be a recurring expense for operation.
There is no hard fast rule about how much rent should cost, but it is best to keep overhead low, provided the space rented is pleasing to incoming customers. Rent may cost anywhere from 2 to 20% of the total cost of expense for regular operation and maintenance.
When calculating the occupancy cost, a business owner must divide the amount of revenue into the cost of rent. Ideally, a business owner will want the cost of rent to land between 5 to 15% after looking at revenue versus rent costs.
Before choosing to rent a pricey piece of property, it is prudent to evaluate whether the cost for the location is worth the price tag. If a prime location provides more than enough traffic to produce high sales and plenty of revenue, the occupancy cost is going to be a lot lower. If choosing to play things safe, it is better to pick a property with lower rent and let advertising, marketing, and other measures make up the difference.
Get through the first year and have a stable, loyal customer base before making an upgrade to more expensive real estate.
As an upside, rent can be calculated as a tax deduction depending on the usage of the space.
Paying For Utilities
Utilities are a must-have for any business to function.
If a business cannot afford to pay the bill for running water for an on-site bathroom, electricity, gas, air conditioning, phone, and internet services, there might as well not be a business. Don't forget to add trash removal and sanitation to the list too.
Depending on how much square footage the business requires, the cost of utilities may vary.
Business owners can tally the percentage of money owed regularly for utilities by dividing total utility costs by the total cost of all business expenses required. Afterward, the number at which you arrive is multiplied by 100.
Insurance & Liability
Making it a priority to keep a business covered by liability insurance is essential to ethical practices and being proactive.
To operate a business without having insurance coverage is extremely risky and unnecessary.
Most general liability insurance packages should protect a business's interests in case of damage caused by flooding, fire, property damage, bodily injury caused to employees or customers, and protect against multiple types of claims.
If a business has to incur litigation, insurance may also help cover lawyer and court fees. It is valuable to become familiar with the types of insurance available specifically to cover a business.
Inventory Costs For The Supplies You Need To Keep Running
Inventory and supplies are always a necessary expense, to keep a business humming along smoothly.
Depending on the type of supplies needed for a business, the cost may fluctuate if a supplier is low in stock, or invoice payments are late. Being prepared for a full year requires including the cost of necessary inventory from office supplies, furniture, or food depending on the nature of the business.
The cost of inventory is not solely focused on the price paid for items, but the carrying cost is another point of business to consider. Also, a business may have to incur distribution cost, processing cost, or loss of income due to shrink.
Advertising & Marketing Costs
Customers and orders are the lifeblood of a business, and even well-established business continue to rely on advertising and marketing to bring in new customers and remind old customers of their goods or services
Typically, most businesses may spend anywhere from 1% and up to 30% of total sales toward promotions via ads. 50% of sales may be used by a newer company when introducing a marketing and promotion campaign for the first time.
Generating good reviews from the public, maintaining a professional image via a quality website, attending trade shows, and printing and distributing brochures and more all add up. The cost is a necessary investment to keep a business at the forefront of a customer's mind on a regular basis.
Payroll Expenses For Employees
Even if a business is operated by a single owner without employees, even the owner has to pay themselves for their contribution to keeping the business functioning.
The owner of a business and all necessary employees are valuable human capital. Retaining the services of all workers vital to the regular operation and maintenance of a business requires monetary compensation to be paid out at regular intervals.
Depending on how many staff is onboard and the structure of the business and its relationships to its workers, payments require either a 1099 form or a W-2.
A percentage of payroll taxes can be deducted by businesses.
When a business owner has to go to court, needs counsel when overlooking or drafting up a contract, or there are other pressing legal matters or concerns, an appropriate attorney requires a retainer fee.
Attorneys do not come cheap, as depending on the nature of a business, its reputation, service needs, and profitability, the price tag for a single lawyer or complete legal team may vary.
An attorney is something that a business should not skip out on having, just in case.
Tax Advisor Fees
Struggling to deal with taxes and accounting to cut corners is an ill-advised move.
It is far better for a business owner to keep a trusted accountant to handle taxes and to help uncover all types of tax-write offs and applicable deductions. A seasoned accountant with a CPA, or experience with the IRS makes an excellent choice.
As a business needs to send in their taxes quarterly to the government, a quality vetted accountant can mean a world of difference for a business's bottom line. Cents and dollars do add up.
Prepare For The Cost To Be The Boss
Choosing to run your business successfully, by first preparing for all expenses necessary for daily operation is exciting and completely worth doing.
Spending the time to see how much capital is needed to invest in a business for at least one full year of operation can provide a much-needed layer of protection for when things go wrong.
Inventory may be late to deliver, a change in tax law may trigger a need to restructure a business's operations, or there may be a need for a different type of insurance plan. No matter what concerns may come up, being prepared can save a lot of heartache and money in the long run.
Yes, a business may become incredibly profitable with numerous accounts and customers to keep things afloat. However, a sensible business owner should not rely on projected valuations and past trends with income and events.
Certain recurring costs will be inevitable with most businesses to function adequately and provide a regular source of meaningful work and value to the community in which it is stationed. There is simply no way to cut corners, nor should a business shirk away from necessary expenses and maintenance costs before considering opening its doors.
Learning the lingo, understanding how to calculate percentages, and finding a balance regarding budgeting for costs can help keep a business in the black.