In broad strokes, an operational expense is any cost that is necessary to running a business. Some of the more obvious expenses that fall under this umbrella include the cost of renting retail space, utility bills, wholesale expenses and labor.
However, as any small business owner is aware, not all of operational expenses are quite so on the nose. Over time, less obvious sources of overhead start to add up, and those who aren’t careful risk being blindsided by debt and, ultimately, bad business credit.
In this post, we’ll look at some of the operational expenses that have a tendency to sneak up small businesses and create obstacles for management.
Compensatory costs
Compensation doesn’t just amount to paychecks.
According to Zane Benefits, smaller businesses pay for 85 percent of employees’ health care premiums, which based on the 2015 average cost of $6,163, equates to about $5,264 each year, per full-time employee. For family plans, employers covered about 65 percent of the cost, or $10,720. Depending on whether your small business has only a handful of full-time employees, or closer to the 25-person mark, as well as how many of them have families, you may be responsible for tens of thousands to hundreds of thousands of dollars just for employee benefits. While the ACA does not directly penalize businesses with 25 or fewer employees for not offering health benefits, good coverage is still important. In fact, quality health coverage can be the determining factor for why a certain employee will sign on with you instead of the competition.
This doesn’t factor in other costs and basic accommodations for workers such as holiday parties, employee discounts, stocking the break room with coffee, etc. These may seen nominal, but such costs can add up over time. If employers aren’t careful as they account for operational expenses, they can easily run up a deficit. If business owners are unable to pay off their debts in a timely manner, their business credit will suffer, and that will make it harder to dig out of debt.
It’s therefore important that small businesses do the math ahead of time and capitalize fully on any money-saving opportunities available. For instance, under ACA, small business that have fewer than 25 full-time employees, an average worker salary of $50,000 or less and that cover at least 50 percent of their employees’ insurance premiums are eligible for tax breaks and tax credits. Taking advantage of these provisions can help small businesses avoid becoming mired in operational expenses.
Asset insurance
It’s no secret that small businesses need to insure certain assets. According to Forbes, there are a variety of different types of small business insurance including, but not limited to, the following:
- General liability insurance: This is mainly for protection against legal liabilities such as injuries, libel, settlement bonds, etc.
- Product liability insurance: This covers, for instance, bodily harm that might result from a defective product.
- Professional liability insurance: Also known as errors and omissions insurance, this covers practice oversights (i.e. medical malpractice).
- Commercial property insurance: This covers certain damages to commercial property, as outlined by the carrier.
- Home-based business insurance: Helps insure business assets that might not be explicitly covered under homeowner’s insurance.
Depending on the line of work your small business deals in, some of these may be more important than others. A clothing retailer might be at low risk or product liability insurance; however, a flood or fire could be devastating, thereby necessitating the purchase of commercial liability insurance.
At some point, insurance policies may feel like pointless expenses, especially for business owners who have the good fortune of not ending up in any of the snafus mentioned above. But at the end of the day, all it really takes is one disaster to destroy an uninsured business. Make sure that your most important assets are insured. This is one operational expense that you can’t afford to shirk.
Odds and ends
Depending on the industry, there will always be a few odds and ends that could increase operational expenses at irregular intervals. One example is travel costs. For a brick-and-mortar retailer, this probably wouldn’t be a huge deal. However, a sales-heavy company might require a lot of business travel. Meanwhile, a small contractor, landscaping business or home maintenance company may need to purchase or lease vans and cars to reach clients, buy the equipment that’s necessary to complete these tasks, and on top of that, obtain workers comp insurance.
Another example is marketing expenses. For example, occasions will arise in which a greater marketing push is necessary to boost the bottom sales down the road. These unique opportunities (i.e. seasonal events) will require merchant capital that won’t necessarily lead to immediate return on investment, but have significant potential maximize long-term profits. The same can be said for the hiring process, which on average, can cost 30 to 50 percent of the annual salary of the worker being replaced, and sometimes even more than that.
For these odds-and-ends operational expenses, small businesses will need immediate access to cash, and sometimes the only way to get that is to take out a small business loan from an alternative lender. If you play your cards right, this cash advance should ultimately improve your revenue stream.
