business hidden cost

12 Hidden Costs of Running a Business You Are Not Aware Of

As your business grows, there will always be challenges to tackle. Most SMEs experience increase in costs and constantly fire fights as the business scale, but fail to identify the reasons behind it.

There are many lurking “hidden costs” when scaling as business and poses one of the biggest headache for a business owner.

Meeting Costs

Meetings are costly group activity because a meeting is usually an activity that involves many of those in the leadership or management team. Every minute in a meeting should be multiplied by the number of attendees’ value to the company to reflect the actual time invested in a meeting.

Many in management don’t have the proper skillset for meetings, which results in the six lacks: Lack of preparation, lack of topic, lack of execution, lack of necessity, lack of time management, and lack of focus when speaking.

Ineffective meetings that does not result in tangible and productive outcomes consume resources and reduces staff morale.

Procurement Costs

Every company has a different procurement process and procurement typically poses significant risk for redundant cost leakage. We often only focus on the volume and prices of purchases, failing to pay attention to other details.

Personnel in procurement roles might misjudge purchase prices or fail to conduct sufficient due diligence on current market trends. Such human errors might lead to the business missing opportunities to secure a better deal.

SMEs do not typically have sufficient scale to internalize a system of checks and balances for tenders and bids, unlike bigger corporates.

Communication Costs

Communication is an important part of business operations. Many businesses provide their employee with training on techincal skills required by the industry, but most companies fail to provide training on communication skills.

Communication between colleagues can potentially get lost in translation. Ideas and tasks might not be expressed clearly, or everyone has a different interpretation on the same set of unclear instructions.

Important announcements such as new product launches or new SOP guidelines should be communicated via one official channel such as company’s internet or bulletin board.

All enquiries from other staff members regarding new announcements should be redirected to the respective department or personnel only to ensure information is disseminated via one channel.

Tasks and instructions from management should be communicated clearly and without any ambiguous intent. Culture of speaking out and clarifying doubts should be encouraged.

The Cost of Overtime

Lots of employers may find the overtime employees put in as a display of work ethic. However, this may lead to higher overall labor costs and there are three reasons why:

One. Overtime is not always a result of a heavy workload, but low productivity and inefficient work processes.

Two. Overtime requires more effort and energy from the employee, which is a burden on the employee’s health. Frequent overtime, in the long term, could limit an employee’s performance, preventing the employee from performing at peak level. For example, a machinery operator could become fatigued due to frequent overtime, which may lead to workplace accidents.

Three. Whilst working overtime, the employees don’t always spend it on work-related tasks. Many employees use the company’s resources to conduct personal tasks while claiming overtime. Many losses of company’s internal data may happen during overtime as there is no supervision and more privacy.

Financing Costs

Many SMEs owners are over optimistic when projecting their future revenue and growth. When seeking a business loan in Singapore to support their expansion plans or to fund a new major project, they tend to underestimate or factor in the true cost of financing.

Aside from banks’ commercial loans, SMEs should also source for any government assisted financing schemes such as the Temporary Bridging Loan Programme which could help lower interest costs. Aside from just factoring in the interest costs of a business loan, other costs should be taken into consideration.

There are other hidden financing costs that might not be obvious to business owners whom are not savvy with SME loan financial products, such as processing fees, annual fees and other related costs.

There is also opportunity cost to consider as well as a hefty monthly installment to be serviced might affect the company’s working capital and cash flow. The funds that are to be set aside for servicing loans might be better deployed to other higher value activities such as payroll for a senior and experienced employee or launching a marketing campaign.

There are many other creative ways to secure financing instead of traditional bank loans and all viable options should be considered to come up with the most relevant method for the situation at hand.

Cost of Misplacing Employees

In human resource management, it is important to place the right person in the right position. Unfortunately, not many businesses can put that in practice.

An effective HR process would include attracting and placing the right people in the right role. It is important to identify the strengths and weakness of your staff team and deploy them to suitable job scopes.

By placing employees into roles and job scopes ill-suited to their particular skillsets and aptitude, performance and talent retention will be adversely affected.

Again, this will indirectly lead to employee turnover costs. Every employee departure represents extra costs for the company because the company has incurred resources and costs to train this very employee when he or she first joined the company.

Subsequent to that, the company must now train the new recruit who replaces the departing employee as well. In addition to the recruiting costs, the company also must consider the risk of placing the new hire in an unsuitable position.

Furthermore, a senior employee’s departure could mean a loss of important business information or data, not to mention that the departing employee is likely to join a competitor.

Therefore, the departure of an employee, especially a senior employee, is without a doubt, represents a higher expense than the salary paid to the employee.

Cost Due to Inefficient Process

Many small and mid sized businesses appear unorganized because there’s a lack of proper processes and SOPs in place for operations, which is a common mistake in business management.

Behind every business that struggles to grow, there’s a chaotic or illogical process of its operation. They’re paying a high price for that, while failing to address the issue.

A standard and optimized work flow and process is the chain of an operation. Without a reasonable, effective process, there is no systematic management of the different tasks which leads to different problems such as interrupted tasks, or tasks that need to be re-done.

All of which limits the growth of a company.

Idle Resource Costs

Idle resources are the most common “hidden cost” in a company, such as idle equipment and manpower.  Although they may not consume the resources of the business, they’re still assets of the company, which means the company is burdened with maintenance and upkeep costs.

Too much underutilized resources also reflect the inefficient utilization of assets in a company. Over hiring permanent hires due to an one-off major projects could also result in cash flow drain on excess staffing. Instead, look to outsource non-critical functions of the business or take on temporary staffing to handle peak seasons of the business.

Deficient Company Culture

Some say that the company culture is the soul of a company, and it is displayed in every employee’s attitude to work. The company's culture is heavily influenced by the founder’s worldview, values and habits.

This is why some people say that a company’s culture is really just the character of the founder.

Many may disagree that a deficient company culture could be seen as a cost to a business. You may notice that in some companies, employees are unmotivated, with low productivity.

Regardless how talented a new hire is, the new hire either ends up leaving or becoming just as unmotivated. Ex-employees often blame it on the “environment” or toxic culture within an organization.

A company culture that is unfulfilling and not entirely inspirational could lead to higher attrition rate, low productivity and erodes the ability to compete with industry peers.

Reputational Cost

We often see businesses that have the tendency to delay payments to suppliers, employees, and banks, or even make frequent petty deductions on payments due to suppliers.

However, in the long run, this may lead to a significant hidden cost for the operation. First of all, suppliers must have factored that into their prices, meaning a company with tardy payment conduct will not be able to purchase materials or services at the lowest price, or do without credit terms.

Secondly, delaying payroll or statutory CPF contributions beyond a certain prescribed period is illegal, and punishable by law. Delaying payment to the banks on business loan repayments would also affect the company’s credit standing and future access to financing.

Excessive Risk

It is every entrepreneur’s dream to scale a business and drive up valuation of the company in the shortest possible time. However, the faster you go, the riskier it might get.

Especially for SMEs whom might be able to achieve fast growth in during startup phases, all it takes is just one crisis for the company to unravel.

Risk calculus is a common bedfellow of any business owner. However calculated risks for decisions undertaken with proper analysis and due diligence, and within the domain knowledge of a business owner, are considered "good bets".

Reckless risk appetite such as investing heavy resources into a unfamiliar business within an unrelated industry due to fear-of-missing-out and hearsay could lead to unexpected costs and disruptions.

Taking on big bets, undertaking excessive leverage and high business risks entails a significant hidden cost.

It might be prudent to work on the fundamentals first and ensure the company has strong foundations which to drive future growth on.

The Entrepreneur Fallacy

The “Entrepreneur Fallacy” refers to the inability of the founder to adapt and reinvent himself/herself as the business scales and grow.

Many entrepreneurs are gritty individuals who vested blood and sweat to build up their business. Initially, founders have many hats to wear and are constantly involved in all aspects of the operations.

However, as the business grows, some founders are unable to dislodge themselves from the frontline into an appropriate strategic role. On a personal level, this might result in burnout.

At the business level, overzealous founders who put themselves in the center of all  operations will find it tough to build a team which does not require constant input from the leader. A successful entrepreneur is one whom is able to create a company that is able to run by itself with minimal interference by the owner.

Many small business owners common grouse is that it is hard to find capable and motivated young millennials.  However what many company lack are not talents, but the ability to discover talents, and the wisdom to place the talents in the right place.