Unveiling the obscured costs of starting a business.
The world is in the midst of an inflationary environment that hasn’t been seen for many decades. Labour shortages and high materials costs are all being exacerbated by supply-chain issues. While these rising costs are becoming more obvious by the day for consumers, we’re also starting to see businesses struggling to deal with them. Retailers are trying to manage their inventory levels and higher costs all while hoping customers will continue to pay these higher prices.
When inflation takes hold, it can be a tricky environment for many businesses to operate in, and it will only become harder should the cost of borrowing continue to rise. Inflation is a hidden cost that can affect a business when you least expect it. For those starting a business, it’s more important than ever to identify hidden costs that might be getting overlooked. And, unfortunately, business plans often don’t help with this.
A good business plan can give comfort to entrepreneurs and investors, in part because it details objectives, strategies and tactics, along with the anticipated profits and expected costs. There is, however, a wide variation in business plans. Some are voluminous demonstrations of thorough research, while some exist as a mere template borrowed from the internet. Others, it has been found, reside in the mind of the entrepreneur. History shows that all styles of business plans can prove to be successful – but hidden costs still escape their grasp.
“Limited funding separates the pretenders from real-deal founders.”
These costs are truly hidden until time and experience bring them to the fore. Fortunately, there are some areas we can look at to try to understand where these costs are hiding. Below are a few of the hidden costs of setting up a business.
Time
Keen to get the start-up established, the entrepreneur can quickly find that the sense of urgency that took the venture from an idea to a business plan and now an embryonic business is not shared by others.
Those timelines for tasks in the business plan, often based on some experience and more than a little optimism, now highlight that whilst you may be able to manage your time, you are powerless to manage those who have more time than you.
The reality is that even if absolutely nothing is done in any one week to advance the start-up, time will keep moving on. Time, or more precisely lost time, costs money. Just how much time is usually lost in a start-up is mentioned later in this article.
Costs
Time is a cousin of costs. Time is expressed graphically as a timeline from the left of the page to the right. Costs, on the other hand, appear in financial reports, where they change colour from an understated black to a worrying red.
Costs are termed to be mounting, and in the extreme, are deemed to form a mountain of debt. These potential mountains of debt start as merely delayed income resulting in increased debt/investment on the books. These incidental events, mere speed humps on the road to success, can grow into a small mountain of debt that a small start-up can’t scale.
The formula for hidden costs is also discussed below.
Relationships
Dealing with suppliers as a start-up is always hard. They are happy for you that you are taking a risk. Whilst they may be happy to deal with you as a person, when you link yourself to a start-up they manage your account and your needs according to the risk that you present. Your relationship is now strictly based on the old adage “business is business”.
As a start-up you feel optimism. As a supplier they see risk in big red lights. The end result is when a service is to be supplied, you will still be served, but last, as you are the least of equals. The cost of this situation is across all KPIs in the business plan.
Sleep
When the day is done and every opportunity possible has been exploited, the wins are celebrated, the losses accepted as they were to be expected, and the disasters, well, they are deemed to be an investment in your personal education. The next thing to do is sleep.
Entrepreneurs often relive war stories with humour whilst slipping in a few pearls of wisdom. The universal measure for extreme challenges is the number of sleepless nights. The eloquent may deem a few sleepless nights were had. The more flamboyant will declare far too many and the extraverts may regale with hysterical tales of creditors being delayed, banks being demanding and a last-minute customer saving the day, whilst slipping in the story of endless sleepless nights. The cost of many sleepless nights is hidden in a lower performance level for the entrepreneur.
The ‘rule of twice’
In understanding these hidden costs of starting up a business, the ‘rule of twice’ is one of the most reliable tools. The baseline is to take any assumption in a business plan, apply the time or cost and make it twice what is expected. Then remember that nothing worthwhile is achieved without being brave enough to commit, whether it be personal relationships or going for a driver’s licence. If you wish to gain something, it will demand more of you than you thought. The hidden costs will be forgotten in the super buzz of setting a goal and having achieved it. That excitement may also stop you from getting to sleep.
This article first appeared in issue 38 of the Inside Small Business quarterly magazine
