7 Hidden Costs of Running a Small Business

On Sep 30, 2023

For most prospective small business owners, many of the costs of running a business are clear from the beginning of the process. Expenses like leasing commercial office or retail space, equipment, product inventory, and payroll, for example, usually don’t come as a shock to entrepreneurs who are planning their business startup costs.

So, why do so many of them end up running into issues with the bottom line?

According to the latest data from the US Bureau of Labor Statistics, a staggering 90% of startup businesses ultimately fail in the long run. Among these, 16% fail due to cash flow problems or other financial issues—and that figure doesn’t even count startups that fail due to poor marketing strategies or a bad product-market fit.

In many cases, it’s not that these businesses fail to account for these predictable one-time expenses or their fixed costs—despite the fact that they’re typically on a tight budget. Rather, it’s a lack of preparation for the unforeseen problems that arise when running a business, and the unexpected costs that come as a result.

With a virtually infinite number of types of startup business, a wide variety of possible unexpected expenses exist. With that said, some of the hidden costs of starting a business seem to come up frequently despite the industry—let’s examine some below.

Shrinkage

Shrinkage, or inventory shrinkage, is an accounting term that describes when a business has less items in its actual inventory than has been recorded in the balance sheet. In other words, if physical inventory is less than recorded inventory, shrinkage has occurred. The calculation for inventory shrinkage is simple:

Shrinkage = Recorded Inventory – Actual Inventory

What Causes Shrinkage?

Common factors that contribute to inventory shrinkage include the following:

Shoplifting
Employee theft
Vendor fraud
Administrative errors
Damaged product

Put simply, inventory shrinkage refers to preventable losses that are either deliberate or arise from human error. Shrinkage is a big issue for any business—big or small—that sells physical goods. Typically, a small amount of shrinkage is unavoidable. If it gets out of hand, however, the bottom line can be negatively affected—especially in businesses with thin profit margins.

Retailers, for example, are hit the hardest by inventory shrinkage as their business models often rely on moving products in large volume with a small profit margin. In fact, according to the National Retail Security Survey released by the National Retail Foundation, inventory shrinkage accounted for a peak $61.7 billion loss for US retailers in 2019.

Shrinkage isn’t just limited to retail businesses though. Things like vendor fraud, employee theft, and clerical errors can affect businesses of just about any kind. For example, food service businesses can experience shrinkage if food items arrive expired, if less items actually arrived than are recorded, and even from things like employees taking food.

Preventing Shrinkage

In many cases, implementing a few new processes can help to reduce an organization’s shrinkage. Focus on better communication, clarity around organizational policies, and proper training of employees to create a culture of accountability and efficiency in the workplace.

Additionally, better technology for inventory accounting, employee management, and security are all powerful tools for combating shrinkage in any industry.

Another simple, but very effective measure to take is making a habit of double and triple checking vendors’ deliveries. In many cases, checking every single one for errors like missing or damaged products is enough to stop some major issues in their tracks.

Merchant Fees

Merchant fees, or credit card processing fees, are a percentage of each transaction charged by a merchant service (such as VISA, MasterCard, or American Express) to a vendor for processing credit card transactions.

In a world where eCommerce is becoming more and more commonplace, especially for small businesses, this becomes even more relevant because transaction fees are typically higher for online purchases—creeping as high as 2-3% per transaction. This can have a big effect on an online retailer’s bottom line!

How to Save Money on Merchant Fees

There are several ways a business can try to bring down these transaction fees, including the following:

Negotiating Lower Transaction Fees

Credit card processors are motivated to work with organizations that deal in high volume, as they get more fees. As a business grows and shows steady increases in its revenue and transactions, business owners should continually check if they’re getting the best deal possible.

Take Steps to Minimize the Risk of Fraud

The risk of fraudulent transactions is factored into processing fees, so boosting the security of each transaction helps to reduce this risk, and thus, the fees.

This can be as simple as ensuring cards are swiped/have their chip read as often as possible in…