Underestimating the costs that you’ll absorb as a new business can lead to business failure; Nicola Bannister of Flogas explains the hidden costs you should be aware of.
Employee turnover is often a cost that is not budgeted for in forecasts or annual financial projections. The costs of employee turnover can be huge as there is often a time where you are paying two salaries as the new member of staff learns from the old.
Other costs incurred by employee turnover include training costs, new uniform and/or equipment, and recruitment costs (advertising, taking time to interview and select).
Always remember that it is cheaper to retain your staff than hire new ones. To do this, think about the incentives that you can offer employees. These may include competitive salaries, the opportunity to work from home, casual dress code, and other incentives such as employee of the month prizes. Although these may sound costly, you should think of these as investments into your employees. The cost of incentives and rewards will be lower than the cost of recruiting new staff.
Opportunity costs can be difficult to measure as often they are not seen as financial costs on a balance sheet. An opportunity cost is the cost of pursuing one opportunity at the cost of losing out on something else. For example, you could be wasting time working internally in your business when you could be concentrating on getting new clients.
To minimise opportunity costs, you should work efficiently and ensure that your business is doing the same. Having a schedule for employees eliminates the problem of two people working on one activity. Consider the hours that you, as a boss, spend on other people’s work when you could be conducting tasks that are beneficial to the business. Ensuring that staff are well trained can prevent other employees having to pick up on their work when they could be working on their own tasks.
Shrinkage accounts for the loss of inventory between purchases from a supplier and purchases by the customer. Shrinkage can also be the loss of company assets in other ways, for example theft from staff – this may be innocent to them, such as stealing office equipment or using the company vehicle for personal errands, but it all adds up.
An effective inventory management system can help with this – for example, inventory can be fitted with barcodes that are scanned at every stage of their delivery. One way to encourage employees to act responsibly with company equipment is to explain the implications that minor theft can cause and encourage them to consider their actions.
Insurance is often considered by entrepreneurs, however, there are many different types of insurance that you might not realise are applicable to your business. If you aren’t insured for the right reasons, you could face massive repercussions and expenses that could affect the running of your company.
Your insurance must cover you for accidents, loss, and difficulties with a client that could lead to legal action. You may need public liability insurance if you work in many external locations, or invite clients to come and visit you. This will cover you if a visitor has an accident on your site.
Professional indemnity insurance will also be required if there is a chance that your business could cause a financial loss for clients.
All business equipment and tools should be insured and you should cover yourself for personal accidents and illness.
There are some extra costs that you might face as an entrepreneur – one of which is paying for memberships for your local professional groups. These groups often keep business people up-to-date with the latest news and offer entrepreneurial advice. Being a member of these groups can also bring you some discounts for your business, such as good loan deals and offers on supplies and training.
When purchasing new equipment, consider renting instead. If you only need your equipment for a short period of time, this could be the cheaper option instead of paying a large amount of money out at once.
Offering credit to customers can be one way to gain new clients as it seems attractive. However, it can be dangerous if this credit is not paid back in time as it negatively affects your cash flow. Consider what actions you can take to hold your customers accountable if they break their credit agreement and discuss overdraft protection with your bank.