It’s thrilling and full of possibilities to start a new business, but it can also be daunting. As a result, it’s critical to view effective financial planning as a vital task as you embark on an entrepreneurial journey. After all, nobody wants to make a plan and then wonder where all the money has gone after three months of operation. Overlooked expenses are a common culprit in this sad scenario.
As a first-time entrepreneur, you may assume you have everything under control when it comes to your new business’ financial budgeting. However, you may neglect a few crucial costs. Four common overlooked expenses for startups are listed below. You may miss these as a first-time entrepreneur.
1. Business Insurance
Business insurance is more expensive than you might expect, especially as you begin to hire staff.
When you hire staff, you might underestimate the cost of additional liabilities. These business insurance expenses include the following:
a) Workers’ Compensation
Workers’ compensation costs represent the benefits you must pay to an employee who is unable to work (whether temporarily or permanently) because of an injury sustained on the job.
These expenses vary a great deal depending on your line of business and the number of employees.
For example, workers’ compensation policies for office personnel are typically far less expensive than policies covering tree trimmers. Since one field is far more likely than the other to sustain work-related injuries, the premiums are priced accordingly.
b) General Liability Policy
For the sake of your new business, you’ll possibly be required to carry a general liability insurance policy. This is an easy one to overlook when budgeting, especially if you don’t have physical premises.
The useful thing about general liability policies is that they can cover more than just property damage and injury.
Policies can also offer some protection against lawsuits related to libel, slander, defamation, or copyright infringement. For anyone taking part in marketing, blogging, or publishing, that coverage can be especially helpful.
2. Employer Payroll Taxes and Other Fees
New employers sometimes make the mistake of only accounting for wages in their overhead budget. While that is certainly a vital component, there is a multitude of other taxes and fees that rack up expenses. These include employer FICA taxes, federal and state unemployment taxes, and payroll processing fees.
To get a more accurate picture of your upcoming overhead costs, you can utilize a payroll calculator. Alternatively, you can request an estimate from your payroll processor.
Additional payroll costs certainly aren’t the only sneaky budget breakers, though.
With cash and check payments becoming increasingly rare, customers generally prefer electronic means of payment. While there are definite perks of this system, processing fees can really take a bite out of your profits.
Depending on the credit card, processing fees usually average from 1.5% to 3.5%. Of course, there are many options apart from credit cards. PayPal, international wiring companies, and payment plan facilitators such as Synchrony all have their own rates.
If you’re trying to determine your cash flow and don’t take these fees into consideration, you could come up short.
3. Software License and Subscription Fees
With the digitalization of various business operations, your business might need to turn to different computerized systems to help automate operations. These systems do not come without a price, of course, but you might forget to include the costs in your budget.
Most of these systems need to be paid monthly, quarterly, or annually. You will be required to pay a recurring subscription charge in order to access the product throughout the subscription period. If you stop paying for the subscription, you will lose access to the product.
On the other hand, you might choose to make a one-time payment for a perpetual license. With the license, you can keep the product and use it perpetually. However, after a specific period of time, you will no longer have access to continuous product updates or technical support.
For example, if you use QuickBooks only for bookkeeping rather than payroll, you might not need updates. If you use QuickBooks to run payroll, however, you will need to upgrade periodically to access current payroll tables and tax rates.
4. Annual Expenses
You can forget to include large annual expenses during your startup budget.
These are expenses or the estimated aggregate amounts to be incurred in connection with your company during the applicable calendar year. They include costs for business registration renewal, tax preparation, and personal property or real estate taxes.
a) Business Registration Renewal
Business registration fees are usually small, but they do vary by state.
While the amount is usually not one that is going to break the bank, it’s still something to account for. Failure to file on time will cost you fines, yet another of your overlooked expenses, so make sure to mark your calendar to renew.
b) Tax Preparation Costs
Tax preparation costs are the costs incurred in the preparation of your tax return for the year.
This might be negligible if you are confident in preparing your own return. If you engage the services of a CPA, however, this can run into hundreds or thousands of dollars.
In addition, the IRS requires Form 5500 tax returns for certain retirement plans. So if your startup wishes to offer a 401k plan to employees, that is another annual expense to consider.
c) Personal Property/Real Estate Taxes
You might also overlook personal property and real estate taxes in your startup budget. Depending on your state and local rates, real estate taxes alone can be substantial.
This typically only applies if you own a structure. Sometimes, however, you’ll factor these into monthly rent payments for leasees.
Personal property or use tax, in general, refers to assets other than land or permanent constructions.
Not every state requires this type of tax. Those that do, however, typically collect on large or expensive equipment. This would include construction equipment, dental x-ray machines, and other depreciable items.
The Bottom Line
It can be exhilarating to start a new business. However, getting caught up in the excitement and forgetting the intricacies of budgeting can lead to poor performance of the business.
So set aside some money for any unanticipated or forgotten expenses. The majority of businesses fail because they do not have enough cash on hand to deal with unanticipated challenges that arise during the business season.
If you want your new business to boom, pay attention to your budgeting process, account for overlooked expenses, and seek financial budgeting help from experts!