small business

By Jay DesMarteau, Head of Small Business Banking, TD Bank

Owning a business comes with an endless stream of expenses such as inventory, office rent and employee salaries. But operating a business may also include items you never considered as potential or necessary costs when starting your own boutique or law firm. Although 80 percent of small business owners in TD Bank’s 2017 Small Business Month Survey expressed confidence in managing their businesses’ finances, these hidden costs can add up and put a dent in cash flow if not properly managed.

Among the top most overlooked expenses in business operations:

  1. Business licenses and permits – Proper licensing and permitting – which could be one-time or annual expenses – can be essential to keeping your doors open. Some fields such as accounting or real estate typically require professional designations to practice, and many other industries and municipalities require filing for a local or state business license. Additionally, business owners could have expenditures to set up a LLC, S-Corp or other legal structure to further protect their business and assets.
  2. Self-employment taxes – A majority of business owners owe an annual tax bill to cover self-employment taxes. According to the IRS, the self-employment tax is 15.3 percent if you make $127,200 or less. Including taxes for Social Security and Medicare, the IRS states a business owner with an annual income of $70,000 would pay about $10,710 in taxes. Business owners could also incur additional tax costs if employee withholdings were not properly calculated or if deductions are overlooked or misapplied. Consulting with a licensed tax professional can help prevent missteps, while outsourcing payroll functions can ensure compliance and free up hours spent processing payroll.
  3. Professional fees – Small business owners relish their independence, but can become quickly burdened if they take on all operational duties. Being consumed by tasks like payroll or tax prep takes time away from planning strategic moves and working with customers. Fees for accountants, attorneys and more can cost a couple hundred dollars per hour, but turning over tasks to professionals can save on costly blunders later. According to TD’s survey, just 25 percent of business owners have a dedicated banker or financial planner, meaning the majority are missing out on strategic insights. Finding lower-cost alternatives to professional services is possible: consulting your bank is free, while using book keeping software such as Xero or QuickBooks, along with your bank’s online tracking tools, can offer cash flow insights.
  4. Continued learning – While running a business naturally brings opportunities to learn on the job, expanding your occupational and industry knowledge usually means investing in ongoing education. These costs have a wide range for opportunities from attending key industry conferences to purchasing business resource books. Learning key skills doesn’t always have to have a steep price, though; some professional associations and financial institutions frequently offer low- or no-cost seminars for small business owners.
  5. Bad credit score – Carrying a poor credit score isn’t typically an up-front expense, but it could be costly when you want to expand. In TD’s survey, 69 percent of small business owners either weren’t aware of their business credit score or if such a thing exists, meaning they also aren’t aware of how credit scores impact their business’ future. A business credit score is typically used — along with debt-to-income ratios — to make lending decisions. Paying bills on time and not taking out too much debt will boost a score and make a business a more attractive loan candidate, which can lead to better interest rates and terms on loans. Be aware that your personal credit score also comprises a large portion of your business credit score, so missteps in your personal finances could cost your business.

While completely avoiding unexpected or additional, strategic business expenses isn’t possible, there are ways to smartly manage and account for these costs. One method is to use a business credit card – in fact, 46 percent of survey respondents reported using a credit card to cover business expenditures from office supplies and materials to utilities and travel. This strategy also can pay you back, as credit cards such as TD Business Solutions offer cash back on everyday expenses, dining and travel. Small business owners with larger working capital needs could also consider a line of credit for short-term expenses that will help expand the company – to buy or lease new equipment, for example, or to buy a company vehicle.

Entrepreneurship is a costly endeavor, but visions and plans don’t have to be derailed by unanticipated expenses. With a little research and planning, small business owners can manage these “hidden costs” and even make them profitable.

Jay DesMarteau is the head of small business banking at TD Bank. @TDBank_US