Launching a business is a significant achievement but running and maintaining it is more complicated. Data from the Bureau of Labor Statistics show, 20% of new businesses fail during the first two years, with 45% closing during the first five years.
Many businesses fail because owners neglect to factor in all the expenses required to run their operations. As a result, with limited resources, small businesses incur heavy losses to cover unexpected costs.
Tracking and monitoring income while controlling expenses is essential to building a thriving business. Knowing all the costs of running a successful business prevents cash flow problems and allows for more accurate budgeting. Tracking expenses also helps identify areas for cost reduction.
While some business expenses may vary depending on the products or services offered, here are the top expenses small business owners contend with during the ordinary course of running their business.
Paying employees is one of the most significant expenses for small business owners. Payroll costs include:
- Wages, bonuses, commissions, and any profit-sharing arrangements.
- State and federal employment taxes, FICA contributions, and workers’ compensation insurance premiums.
- Human resources, payroll services, recruitment and training costs
In addition to salary, businesses typically offer benefit packages for their employees. Benefit packages usually include contributions to:
- Health insurance premiums
- Dental or vision coverage
- Disability, long-term care and life insurance
- Contributions to 401(k) or other retirement plans
- Stock options
- Tuition reimbursement
- Childcare and adoption assistance
- Vacation and sick time
While some can operate remotely, many businesses require an office or a retail storefront. Expenses related to your work location (even if it is just a home office includes:
- Mortgage payments and property taxes (if you own the site)
- Rent or lease payments
- Home office expenses such as renovations to create a workspace
- Utilities such as heat, water and electricity (if not included in rent payments)
- Maintenance, janitorial and sanitation services
- Telephone and internet service including mobile phone plans and long-distance calls
- Office equipment and supplies such as computers, printers, desks, chairs, fax machines, pens, paper, etc
Businesses incur four types of federal taxes:
- Income – To legally operate in the U.S., every business needs to pay federal income taxes. State and local taxes may also apply.
- All businesses, except partnerships, must file income taxes annually. Partnerships file an information return instead.
- Tax rates depend on whether your business registers as a corporation or pass-through entity (sole proprietorships, partnerships, LLCs, and S Corporations). Corporations pay a fixed rate set by the federal government, while pass-through entities pay according to their income tax rate.
- Self-employment – Medicare and Social security taxes for small business owners and others working for themselves
- Payroll tax (FICA)
- Social Security and Medicare taxes for employees (employer pays half)
- Federal unemployment tax (FUTA) for employees
- Excise tax for certain types of businesses, including:
- Air transportation
Depending on your industry and location, your business may also have to pay the following:
- State income taxes
- State employment taxes
- Sales tax (state)
- Property taxes (local)
Check state and local tax authority websites for your specific requirements.
Insurance protects your business from unexpected financial liabilities, lawsuits, natural disasters and other work disruptions.
The federal government requires businesses have the following types of insurance:
- Workers’ compensation,
- Unemployment insurance
- Disability insurance for companies with employees.
Your state may have additional insurance requirements.
In addition to the required coverage, you might consider optional policies to protect your business from negligence, losses and damages related to an accident or mistake, including:
- General liability insurance
- Business interruption insurance
- Vehicle insurance
- Commercial property insurance
- Home-based business insurance
- Errors and omissions insurance
- Malpractice insurance
- Cyber Insurance
- Business Owners Policies, which combine general liability, commercial property and business income coverages
The type and number of insurances you need will vary depending on your industry and the size of your business.
Marketing and Advertising
To grow your business and generate sales, you need to reach your intended audience. Building your brand costs money but is a necessary expense. Fortunately, the internet and social media have significantly lowered advertising and marketing costs. Marketing and advertising expenses include:
- Social media and email marketing campaigns
- Internet and pay-per-click advertising
- Website design and maintenance
- Logo design
- Business cards
- Databases and CRM systems
- Television or radio commercials
If your business is in the retail, wholesale, distribution or manufacturing industries, buying inventory and supplies is a significant investment. Stocking inventory typically includes shipping and delivery costs. In addition, manufacturing businesses incur material and production equipment costs.
Business travel costs vary by company. Some businesses only travel locally, while others require national or international trips. These costs include:
- Mileage, parking, and tolls
- Rental cars
To prevent your business from becoming a statistic, prepare yourself for the challenges of owning and operating a successful business. Use the information in this article to educate yourself on the costs of running a small business to avoid unplanned expenses.