Small Business Expenses: What to Expect and How to Manage

According to the U.S. Chamber of Commerce, there are approximately 31.7 million small businesses registered in the United States, which makes up for 99.99% of business in the country. Interestingly enough, roughly half of the private sector workforce works under businesses categorized as “small businesses.”

By definition, the Chamber of Commerce classifies “small” businesses as those employing less than 500 people. With the small business sector occupying a major part of the industry, more and more aspiring entrepreneurs are jumping the gun to start small businesses without fully knowing the risks and costs of running them.

According to a 2022 PwC Pulse Survey, business leaders cite employee retention, cyber security, rising production costs, business costs, supply chain disruptions, and inflation as some of the top business-related risks entrepreneurs should brace for when starting a business in 2022. 

Despite these risks, starting a small business is still plausible with the right mindset, effective business strategies, and management.

Why Start a Small Business?

A 9 to 5 job isn’t cutting for most people, especially during and post-pandemic. During The Great Resignation, many employed individuals quit their jobs to explore more opportunities as freelancers or as aspiring business owners. By starting a small business, you can own your time without being limited to the constraints of a 9 to 5 job within the four walls of an office building or desk. For some, starting a small business is an opportunity to explore possibilities of improving their financial health out of their own passions.

According to Shawn Plummer, CEO of The Annuity Expert-

“Anyone can start a small business, but not everyone can keep it going. You have to have that leap of faith to be ready for all kinds of losses—financial, relationship, mental and physical—to ensure the success of even a relatively small business.”

Sure, starting a business sounds fancy, but the reality of it is far from being one. Start-ups go through leaps and bounds to keep their business afloat. Even with decent capital to start with, a business venture seeps money from your pocket like a suction vacuum. Without proper business expectations, you’ll find yourself draining your bank account before you even earn a profit—much less breakeven.

What to Expect for Small Business Expenses?

As a start-up, you’ll find yourself taking more out of your wallet than you earn. Unless you hit the jackpot, most small businesses take two to three years to identify cost savings and become profitable.

Even then, this is a general estimate and is in no way an exact time frame to benchmark your business plans. In fact, according to the Bureau of Labor Statistics, almost 20 percent of new businesses fail during their first two years of operations.

Jarret Austin, Owner of Bankruptcy Canada Inc., says- 

“Most businesses fall into failure or bankruptcy because of the lack of knowledge of what goes into running into business in the first place. People must know that it’s not all sunshine and butterflies but an arduous road of successive failures.”

Before thinking that starting a business makes you an overnight business mogul, here are the most common small business expenses you should expect as you start your entrepreneurship journey.

1. Research and development

2. Business permits and certifications

Let's get a better idea below-

Research and development

All kinds of businesses should start with research and development. Again, jumping the gun is NOT the way when starting a small business. Entrepreneurs need to know and assess all the aspects of business operations, including business finances, marketing strategies, PR, product and service development, etc.

Research and development may sound too fancy, but this boils down to studying the product or service your business will be engaged in, if there is a specific market for it, and the tools and tech you can employ for your small business.

Costs that go into research and development can include expenses related to testing, designing and creating products, tracking expenses, and the like.

Business permits and certifications

Before you are ready to start your business, get the necessary permits and certifications to make sure you comply with all the legal and regulatory paperwork to start a business. This may or may not include city business permits, sanitation permits, fire safety permits, trade permits, and several kinds of licenses, depending on your business assets and the industry. Because it depends on the state where you are registering your business. For instance, if you are forming an LLC in Texas, it doesn’t require a general business license. However, certain business activities may require specific licenses or permits

How to manage:

1. Process your permits early to avoid defaults and surcharges.

2. Make sure to consult with an expert to make sure all necessary compliances and licenses are applied for. Failure to comply with one permit may cost a business a hefty amount in penalties disrupting the necessary operating expenses.

Taxes

Everyone dreads taxes, but they are the necessary lifeblood of the government. As a business owner, it is your duty to pay taxes to the government and comply with local tax requirements.

Businesses usually pay a different rate of taxes than individual compensation earners, and they typically pay more than one kind of tax yearly. According to the official website of the U.S.A. government, this may or may not include the following:

• Income tax
• Self-employment tax
• Employment tax
• Excise tax
• Property tax
• Sales and use tax
• Estimated tax

According to Mark Pierce, CEO of Colorado LLC Attorney- 

“Many small businesses try to avoid paying taxes which, more often than not, ends up in civil cases for tax evasion. When auditors discover evidence of tax fraud, you are likely to suffer bigger losses than when you just paid taxes, which is why tax cases are relatively tricky to deal with.”

How to manage:

1. Pay your taxes on time, or better yet, pay them early. The government offers specific percentage discounts to enterprises that pay their taxes before the deadline.

2. Keep proper records of financial statements and bank accounts for correct taxes to avoid surcharges and interest.

3. If your sales and operations are getting bigger for you to manage solely, hire an accountant to help manage finances and navigate tax deductions for your small business.

Cash flow is an integral part of any business venture. A business needs capital to purchase equipment, and inventory, pay employees, and other necessary operating expenses.

While capital in the form of cash is good, this alone won’t sustain you in the long run. To maintain a healthy cash flow, taking out bank loans is more than normal. In fact, taking out loans (and repaying them on time) can be very beneficial to the business in terms of credit score.

According to Carter Seuthe, Author at Credit Summit-

“Contrary to belief, loans, either bank loans or credit card loans, are not exactly something businesses should avoid. Loans improve cash flow; banks often give you lower interest rates when you are in good credit standing. You can leverage loans to your advantage by maintaining a good debt-to-income and debt-to-equity ratio.”

How to manage:

1. Choose a suitable loan facility for your business. Banks have multiple loan facility offers, and choosing the right one helps you keep up with repayment and manage interest.

2. Are there employees or a section of your business that can work from home so you can reduce utility bills?

3. As much as loans are necessary to keep the business going, paying loans religiously and on time is essential to avoid unnecessary late payment fees and interest.

4. Keep a loan schedule in cases of multiple loan availments.

5. Prioritize paying high-interest loans first.

Two types of costs

Fixed costs

Fixed costs remain constant despite changes in sales or production volumes. This includes rent, insurance, employee salaries and benefits, taxes, marketing costs, legal and professional fees, utility bills, loan capital, and interest repayments. This can include subscriptions and monthly payments for internet service providers or business operations automation systems.

Operational costs/Variable costs

Variable costs are costs that are dependent on the production volumes. Everything that affects variable costs affects production as well. This includes inventory purchases, commissions, direct materials and labor, and packaging costs.

How to manage:

1. Identify all fixed costs of the business and see where you can cut down and save. If you run a service business, you typically require scheduling and business automation software. Look out for premium software that has a Free Plan. This will drastically reduce your costs on operations management.

• Choose a cheaper but well-located area for your office or store.
• Are there employees or a section of your business that can work from home so you can reduce utility bills?
• Reevaluate the business process and see the least number of staff you can employ to reduce salary expenses.
• Get insurance quotes from various insurance companies and compare payroll costs.

2. Variable expenses are directly related to your product and service, so you must maintain product quality and reduce costs without sacrificing one over the other when managing business expenses.

• Maximize inventory use. See which items in your inventory can be used and re-used and avoid wastage. Make sure inventory is adequately accounted for.
• Insurance policies often cover equipment repairs. Make sure to check them before getting something out for repair.
• Manage production costs by negotiating with multiple vendors, preferably through bidding.
• Lower direct labor expenses by hiring part-time employees or getting freelancers

Managing small business expenses and maximizing profit

The continuity of a business primarily relies on two basic concepts—revenue and expenses. A successful business must be able to increase its revenue while reasonably lowering its expenses.

Managing business expenses is integral to keeping the organization afloat, from small businesses to big corporations. Business owners need to know how to manage their expenses properly: doing away with unnecessary cash outflow and employing cost-saving schemes to maximize net profit.

This means that business owners need to identify non-value-adding costs, eliminate them, or find cheaper alternatives. These non-value-adding costs often come in the form of costs spent for idle times, excess motion or transportation, handling, useless inventory, overprocessing, overproduction, and product defects. 

For example, the rework costs incurred in processing a defective item, including additional raw materials and per-hour labor cost, could have been avoided when quality control was implemented in the first place.

There’s only so much you can do to increase your revenue, and it often comes at more costs, like marketing and production expenses. However, reducing and managing business expenses increases your net profit and helps you assess your business processes and internal performance.

At the end of the day, the success of a small business will not rely on increased revenue alone. Forecasting and budgeting business expenses—and sticking to and managing them—is an integral part of business management every business owner must carefully consider before starting a small business and in the course of it.