As a small business owner, your dream has most likely always been to work for yourself. Having the freedom of being your own boss can be both thrilling and liberating, that is until you find out about all of the costs of running a small business. According to Small Business Trends, a little over 50 percent of businesses will fail within the first four years and only 40 percent of small businesses are actually profitable, while 30 percent of them break even and 30 percent lose money each year. Many entrepreneurs are unaware of how much capital it takes in order to achieve their dream and keep it running successfully. The specific amount needed to start a business will vary based on industry, location, and many other factors, however, if you are interested in starting a business you should be mindful of some of the hidden costs.

One cost that many do not take into consideration is how much of your own money you will have to initially put into the business. The Small Business Association had found that in 2015, over half of startup companies used personal financing to build up the business, with the other half using both their personal savings and loans from banks, angel investors, business credit cards, home equity, and other resources. The Small Business Association also had reported that employer businesses will spend more than non-employer businesses; employer businesses in 2015 had 43 percent of them use over $25,000 as startup capital, while only 12 percent of non-employers needing that much.

Along with their own capital resources both entrepreneurs and business owners will look to acquiring small business loans from the bank or other types of lenders. These can be helpful to a small business, however, if they have bad credit the interest on the bank loans can seriously hurt their startup or established business. With having bad credit scores and high interest rates, it can become difficult for small businesses, especially startups, to pay their loans on time; this will not only lower their score even more, but put their business in high risk of going bankrupt.

As a new or existing business owner, you may already have or are looking to hire employees. Employee pay and benefits is another area that many business owners will underestimate, as they only look at the basic pay. However, with employees you will also need to offer medical insurance, sometimes, dental and vision, retirement plans, vacations, taxes, and any other benefits you would like to include. According to Joe Hadzima, a senior lecturer at MT Sloan School of Management, an employee who’s base salary is $50,000 will end up costing you around $70,000 per year after adding all of the benefits and perks. As a business owner you will need to also pay half into Social Security/FICA for each of your employees, pay Unemployment/FUTA (6.2% on $7,000 of salary), Medicare (1.45%), Worker’s Compensation (depending on industry with 0.3% clerical and 7.5% Manufacturing). Hadzima also estimated that with the example of the $50,000 per year employee you will spend: life insurance ($150), health care coverage ($2,000-$3,000 for single person and $6,000-$7,200 for families). Other benefits he calculated include: long-term disability insurance ($250), dental plans ($240-$650), and a number of other benefits that will vary in cost.

Along with employees and payroll, business owners and entrepreneurs are also unaware of how much they will pay in taxes and costs to either purchase equipment or keep your business running. Each business will have their fixed costs, or costs that are the same amount each month; this includes rent paid, loan payments, etc. The most challenging area for business owners and entrepreneurs to estimate for is variable expenses, which are expenses that will change from month to month. For example, a factory that produces Christmas Ornaments will pay more for their electric bill, payroll, materials, etc, during their busy months, but their off season they will pay much less. Businesses will also need to purchase equipment and other necessities at times, which will also factor into variable costs for the business. Taxes are another tricky part, with the amount of taxes owed varying from business to business, it is best to hire a skilled accountant who will be able to properly file and complete your business and payroll taxes.

Owning a business can be an amazing opportunity, however, those looking to start and operate a business should research the startup and maintenance of a business before jumping into to being an owner. It is best to meet with a professional accountant to discuss costs of the business, financial records, payroll, taxes, and many of the other financial needs for your business.

Source: Joe Hadzima, http://web.mit.edu/e-club/hadzima/how-much-does-an-employee-cost.html.

Small Business Association, https://www.sba.gov/sites/default/files/Finance-FAQ-2016_WEB.pdf.

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