There are as many as 30.2 million small businesses across the country. Starting a successful small business that will last, however, takes considerable work. Just half of small business last five years or more. Even world-famous Macy’s founder R.H. Macy started seven failed businesses before successfully launching Macy’s.
One of the top reasons new businesses fail is an incomplete or inaccurate budget. Many entrepreneurs drastically underestimate the costs of starting a business and they never recover from it. Learn all the costs of striking out on your own and carefully — and purposefully — plan ahead.
Taxes, taxes, taxes.
Be prepared for self-employment taxes. According to the Internet Revenue Service (IRS) self-employment tax amounts to 15.3% of your total income for those earning $127,200 or less.
When you are working for someone else, that percentage is still 15.3% but that amount is split between you and your employer. That means your individual responsibility is 7.65%. Paying double that amount when you start your own business can take some adjusting. Visit the IRS website for more information. Use their forms to estimate and pay your quarterly taxes. This will save you from shelling out a lump sum during tax season.
‘The largest cost for me starting a video production business was my time doing administrative responsibilities and being compliant with the government,’ Entrepreneur Tim Ryan told U.S. News.
Many endeavoring business owners consider the things they would like to do, not the administrative work that happens behind the scenes.
Shrinkage describes the loss of any physical product or resource that ultimately affects your bottom line. This is more straightforward for those who sell physical products. Damaged products, products that go missing, or products that are miscounted or incorrectly accounted for all constitute shrinkage.
Companies selling non-physical products may experience similar losses. For example, if a computer that is essential to complete a business task needs to be replaced that comes at a significant cost to your company –especially when these costs begin to pile up.
Employee Benefit Packages
The job market is increasingly competitive — and for employers, too! Offering a competitive employee benefits package can help you stand out and attract the best talent to your team.
Research from the MIT Sloan School of Management reveals that cost per employee can get as high as 1.25 to 1.4 times their base salary.
How Can New Businesses Off-Set These Costs?
Knowing these costs before starting your business and working them into your budget is best, but it doesn’t always happen that way. What if you are facing these costs now when your business is well underway?
Thankfully there are many small business lending options at your disposal, like small business loans. SBA loans describe loans from various lenders; what all SBA loans have in common is that they are guaranteed by the small business administration (SBA).
To apply for an SBA loan, gather the appropriate materials. Generally, you will need personal and business tax returns, business leases, permits, licenses, a personal financial history form, and a borrower information form. Check SBA.gov for a full list of documents.
When you have all of these documents on-hand, choose a lender, and begin the process. Remember that SBA loans are best to help address gaps in finances or small losses. One of these loans will not pull you back from the brink of bankruptcy on its own.
Starting a business requires extremely careful planning. According to Entrepreuner.com, the average founder starts out making just $50,000 per year.
Budget wisely. Do not count on your personal salary to be enough to compensate for unexpected expenses. Research all potential costs, set a reasonable amount of spending and emergency spending for them, and know your resources if you need extra capital.