So, you’ve decided to take your innovative business idea and turn it into a reality. It can be easy to get swept into spending every last cent to make your business the best it can be, but business finances require a lot of attention to detail and careful planning.
While you’re likely aware that it takes a decent amount of working capital to run a startup, there are certain business costs that might come as a surprise when your dream turns into a reality.
To help you set your business up for success, here are 3 unexpected expenses that can topple a startup, and how you can prepare for them.
#1: Business Taxes
When asked about their 2020 outlook, 10% of small business owners said the most important challenge they’re facing is their taxes (behind acquiring new customers).
That’s understandable considering that filing and paying your business taxes is an entirely different ball game from your personal income taxes. As a business owner, you’re on the hook for a variety of taxes, including:
- Business income taxes
- Sales and excise taxes
- Property taxes
- Payroll taxes
- Self-employment taxes
And, some of these taxes must be paid at regular intervals throughout the year. This comes to a shock to many startup owners, often meaning that they’re also taken by surprise by the taxes they owe.
If you don’t stay on top of your taxes, you could face serious fines and even an audit, which could hinder your business’s success—especially when you consider that you’re responsible for local, state, and federal taxes.
How can you avoid getting into trouble with your taxes?
Use professional services: Instead of trying to become an expert on your own, which still leaves you at risk of falling behind on tax laws making errors while filing, consider using a tax software, like TurboTax, to make the filing process easier.
#2: High Interest Loans
A necessary evil for most successful business ventures are loans. While some business owners might be fortunate to have the savings needed to get their startup off the ground, most do not.
In that case, you’ll need to take out one or more loans to fund business activities. However, what many business owners don’t consider is that, in addition to the up-front loan amount, they should also be accounting for the interest they’ll need to pay.
Loan interest is tacked on each month to your monthly payment, meaning that the payment you previously added into your budget might be much lower than what you’re actually paying—leaving you short on cash.
Whether you completely forgot to account for the interest associated with your loan, or you’ve been saddled with a higher interest rate due to your credit situation, you could quickly find yourself in hot water if you’re not prepared to pay loan interest.
So, what can you do to keep unexpectedly high loan payments from toppling your business?
Before you take out a loan: Focus on improving your credit score before you decide to make a move toward getting a business loan. That way, you should be able to qualify for better loan terms, including a lower interest rate.
According to Business News Daily, it’s typically recommended that you aim for a credit score of 700 or even higher before applying for a business loan.
Make sure you also factor in a realistic monthly loan payment when creating your business budget you might even want to get professional budgeting help.
When you already have a loan: If you’re already in the weeds with your higher-than-expected loan payments, you might feel like you’re in a hopeless situation but you can get a handle on things before they get out of control.
Whatever you do, you don’t want to end up having to make late loan payments—this can put your credit in an even worse position.
Instead, figure out how you can cut costs to shift some of your resources towards making these payments in full and on time. After a while, you may be able to qualify for a refinance, which is an opportunity for a lower monthly payment.
Having a bookkeeper that knows the ins and outs of these kinds of hurdles can save you tons of money in the long run. Keep in mind that hiring a bookkeeper and managing your accounts in-house may end up costing more money in the early stages.
For example, filing taxes for your business may require paying for a tax-filing tool like ProSeries, which can be costly. By outsourcing these services, the company you hire will absorb these costs.
#3: Hiring Costs
Hiring employees is one of the biggest expenses you’ll take on as a startup. Not only do you have to consider their salary or hourly wage, but you’ll need to factor in:
- Prospecting (paying for job listings, background checks, etc.)
- Onboarding and training
- Employee benefits
And, if you’re hiring for various positions at once, these costs increase per individual. There’s also the potential for the additional cost of employee turnover.
Many new businesses find themselves in a lurch when they bring on a larger workforce than what they originally need.
So, how can you hire the people you need to get your business running efficiently, without breaking the bank?
- Hire in phases: You only want to bring on employees that you absolutely need. While it might seem smart to bring on people in preparation of future work, it’s an unnecessary cost—and a large one at that. Planning out your hiring will help you budget appropriately, instead of getting caught off guard.
- Have tools for success in place: Because 53% of job applications contain inaccurate information, it’s important that you use tools such as employee background checks in your hiring process. If not, you will likely hire unfit candidates—increasing your employee turnover costs. Make sure you have the tools, processes, and support in place before bringing on new hires.
As you can see, finances must always play a major role in making business decisions in a startup. And unfortunately, when there’s a lack of available income or you need to increase your savings in order to prepare for upcoming expenses, you may need to slow down your progress a bit.
However, by keeping these expenses in mind, among others, you can help protect the livelihood of your startup. After all, you’ve worked hard to get to this point, so some extra careful planning shouldn’t deter you—and in the long run, you’ll see that it pays off.
Alexis Maness has a Bachelor of Science in Integrated Marketing Communications. As a professional content writer, she has over five years experience and is a contributing writer for several San Diego magazines. Alexis specializes in topics related to business, marketing, finance, and hospitality and tourism. She currently writes for 365 Business Tips.
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