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Starting a small business is an exciting venture, but it also comes with its fair share of challenges and costs. While many entrepreneurs focus on obvious expenses like rent, utilities, and payroll, some hidden operating costs can easily sneak up on you if you’re not careful.

In this blog post, we’ll discuss four often overlooked operating costs that small businesses should be aware of to stay financially healthy and successful.

Understanding Operating Costs

Businesses must keep an eye on operating costs and nonoperative activities such as interest expense on loans. Both costs differ in companies’ financial records, allowing the analyst to understand what is associated with revenue and whether the business could be managed better.

A Business owner usually wants to maximize profits.

Because profits depend both upon revenue earned from business operations and on how much it spends on operations, profits could be increased by increasing revenues and reducing operating costs.

How to calculate the operating cost

Operational expense is calculated from the sales price of products- cost of goods sold (COGS). Costs may vary. COGS = opening stock + acquisition + direct expenses – closed stocks Calculate operating expenses total. Operating expenses = Revenues – Operating Profits. COGES – Expenses = Total operating costs.

Operating Cost Formula

Operating costs: Cost of Goods Sold (COGS) + Operating Expenses (OPEX). COGS reflects all expenses relating directly to the production of goods/services. COGS covers the costs of the corresponding activities.

Types of Operating Costs

Although operating expenses typically do not include capital expenses they can include many parts of operating costs. The operating costs refer to two types of expenses: fixed and variable costs which differ largely.

Fix cost: This is a cost that doesn’t change, regardless of the level of production or sales.

Variable cost: A variable cost varies based on the amount of product produced or sold.

Fixed and Variable Costs

Operational charges can vary in size and frequency. Fixed costs are costs that do not change when a product’s value has risen or decreased. Fixed costs generally consist of interest, loan and bank payments. Variable costs are costs showing varying levels depending on production and sale.

Operating Costs vs Overhead Costs

Operating costs generally have different meanings and consequences on a company’s finances. Operating costs are incurred for a business to continue its operations and include costs for personnel, raw materials utilities, rent/lease payments, insurance premiums and much more.

Overhead costs are, however, those commitments to maintain business operations but are often not directly linked to sales or production processes.

operating costs small business

Hidden Operating Expenses:

Transaction Costs

Suppose your customers are paying via credit card. Then, you are definitely paying fees for each transaction, but how much depends on the provider. Typically, you should expect to pay around 3% of the total transaction in fees.

If you have an ecommerce business, then you might find that you are restricted as to who you are paying the fees to and what your fee schedule is (e.g., Square), but if you aren’t, then you need to look around for the cheapest vendor to reduce those fees.

Did you know that interchange optimization saves you money on your payments? Look around and see what fees you can expect to pay, then find the cheapest option for you.

Payment Delays

Not getting paid on time for your services and having outstanding invoices can be a huge financial drain. While you will likely find that many clients are paying on time or ahead of schedule, for those who are continuously late or neglect to settle, this can impact your ability to pay your bills on time, especially if you are just starting up and you are relying on that income to help you pay your outgoings.

If payments are delayed, or you’re forced to choose which bills you can pay due to late or non-payers, this will result in fees, and late payment charges for yourself and even impact your credit score, making it harder for you to get funding for your business.

You can avoid this by coming up with preferable invoicing terms for your work based on an annual agreement, setting up automatic recurring payments for ongoing work or sales, or ensuring that your cash flow can withstand lay payments by having services specifically for this type of thing.

Legal Fees

Not all businesses will need legal fees, but if you do, it can be quite costly. Even small tasks like drafting contracts or reviewing documents can add up quickly. It’s important to have a budget for legal fees in case any situation arises where you need legal guidance.

To minimize this cost, make sure you understand which services require outside help and which ones you can handle yourself. You can also save money by comparison shopping for legal services from different firms or using freelance attorneys.

Technical Support

Technology is a crucial aspect of modern business, and it’s easy to take it for granted until something goes wrong. That’s when you realize the true cost of technical support. Whether it’s fixing computer issues, updating software, or troubleshooting network problems, technical support can cost you valuable time and money.

To reduce this cost, consider investing in reliable technology from the start to avoid issues down the line. You can also save money by hiring an IT professional on a freelance basis rather than having a dedicated IT team on your payroll.

hidden operating costs

Shrinkage

According to Fortune, shrinkage can cost you around 1.4% of your annual sales, and every single business should expect to have some level of shrinkage, especially in the beginning. For some businesses, this shrinkage could be higher or lower ( restaurants and grocery retailers are a good example of this).

But even with the best inventory management system in place, you will still be at risk of shrinkage, so it needs to be factored in.

Whether it’s from stock being damaged in transit from your suppliers to you or you or your customers, spoiling before it sells, theft, accidental damage, or anything else, know this can and will occur and factor it into your expenses so it’s not such a big shock.

Equipment Purchases and Upgrades

You might have bought the newest, shiniest equipment, technology, or software on the market to get up and running, but what happens when it’s sustained some usage? Or if the needs of your business change, what happens next?

Over time, equipment can be subject to wear and tear, improper use, and damage, meaning it will need maintenance, repairs, or even replacement. Nothing stays perfect forever, and if you rely on specific pieces of equipment to get your work done, you need to ensure you have enough in the budget to keep it running as it needs to be and limit breakdowns.

The same goes for upgrades to any technology or software you might be using. Over time, as new services or products hit the market, older iterations become obsolete, meaning you need to find an alternative or updates that keep you operational.

Never presume once you have bought something, that is the end of it. Always be aware you might need to maintain, repair, or replace what you have, and ensure you have the budget to do so.

Administrative expenses

Administrative expenses such as office supplies, legal and accounting fees, and all other general business activities are often taken for granted. However, these seemingly minor costs can add up quickly and have a significant impact on the financial state of your business.

To avoid overspending in this category, keep track of all the expenses that your business incurs and review them regularly to identify any areas where you could reduce costs. Compare this to your income statement. Does it make sense to have that expense? Is it helping you create more sales?

Consider using digital tools and automating tasks to streamline your administrative processes and save money in the long run.

Property Taxes

While many business owners expect to pay lease, rent or council tax on the premises they operate out of, some aren’t aware that property taxes are another expense to add to the list. Not only can this be a nasty surprise for those starting up who thought they were covering everything in their rental agreement but factoring it into your costs is essential.

Typically, these taxes are calculated based on the value of the property you are operating out of, so if your business is growing and you need a larger space than before, be aware that these taxes could increase as well. Worse still, in some places, council tax costs can vary based on how much waste removal services you require (i.e., to what extent your business produces waste).

Before signing an agreement on a new property, be sure to thoroughly check what taxes you will need to pay alongside your other expenses. You don’t want to be caught off guard by additional bills just as you’re settling into your new space.

These are just some of the most commonly overlooked fees and costs for small businesses; sadly, there are many more. But knowing the small details that can impact your bottom line means you can prepare for them and factor them into your budget so there isn’t such a massive discrepancy in your finances.

hidden operating costs

Frequently asked questions:

What are the two main types of operating expenses?

Operating expense generally comprises fixed expenses in addition to variable charges. Regardless of what’s produced or accomplished, fixed costs remain constant. Variable costs vary based on the volume of products produced and achieved. This includes the materials used for the production of products, repairs and services costs, labor expenses.

What Are Capital Expenses?

The cost of buying and maintaining existing tangible assets is called capital costs. Typical tangible assets include parts of machinery, tools, equipment operated by companies, property, offices, and computer software.

They can be deducted from income taxes over time and can be deducted from income taxes, unlike operating expenses deducted during an operating year.

Is Depreciation an Operating Expense?

Depreciation is actually viewed as a business expenditure. Depreciation – A term for fixed asset losses. Fixed assets are critical to business daily operations. Depreciations must therefore be treated as operating expenses in a company’s earnings statement.

How do operating costs affect profit?

Operating costs directly impact your profit margin. Since operating costs are subtracted from your revenue to determine profit, the higher the operating costs, the lower the profit margin.

This means that even if you have high sales and revenue if your operating costs are too high, it will eat into your profits significantly. It’s essential to keep a close eye on your operating expenses and find ways to minimize them to increase your profit margin.

So be sure you factor all these costs into your budget when calculating the profitability of your small business. Always stay on top of them and make sure they are accounted for, so you can continue running a successful business with minimal surprises along the way.

What are common operating costs?

Common operating costs include but are not limited to employee salaries and benefits, rent or mortgage payments for office or retail space, utilities, marketing and advertising expenses, inventory and supply costs, insurance premiums, legal fees, and travel expenses.

These are just a few examples of the many operating costs that businesses may face. It’s important to carefully track and manage these expenses to ensure they are not eating into your profits and to identify potential areas for cost-saving measures.

Be aware of all your operating costs, both big and small, to stay on top of your business finances and make informed decisions for the future success of your company.

Overall, understanding and managing these expenses will help you run a profitable small business.

Conclusion

Operating costs are an inevitable part of running a business, and they can often be overlooked or underestimated. However, by being aware of these expenses and planning for them in your budget, you can prevent surprises and keep your business financially stable.

Remember to factor in maintenance and repair costs for equipment, property taxes when leasing or buying a new space, and other commonly overlooked fees such as insurance premiums and legal fees. By staying on top of your operating costs, you can make informed decisions that will ultimately lead to the success of your small business.

So don’t overlook these expenses – they can have a significant impact on your bottom line. Keep track of them and plan accordingly for a prosperous future for your business.

As always, if you need help managing your operating costs, don’t hesitate to consult with a financial advisor or seek out resources and tools to help you stay organized. By staying proactive and informed, you can set your business up for long-term success. So keep an eye on those sneaky operating costs and continue growing and thriving in the world of small businesses!

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