4th September 2019

10 questions to ask yourselves about the hidden cost of running a small business

When you’re running a small or medium enterprise, some costs are obvious and planned for. Taxes are one example; salaries are another. Running costs, basic insurance, paying back investors and suppliers – those might vary depending on your model, but most owners would agree they are also non-negotiable.

And, of course, you want to pay yourself once in a while.

For most businesses, in the first years of their running, cost exceeds revenue and making a profit is extremely difficult, unless you get some serious venture capital behind you. That’s alright – that’s “the cost of admission” of running any company. But these are not the only ones.

Imagine an employee gets sick, or has to become a carer overnight. Would you put things into place to support them, or start looking for a replacement?

Imagine you spent time and money travelling to important networking events, only to find yourself struggling to “sell” investors on your business. Would you try harder, or would you re-evaluate what kinds of events you are going on?

Imagine that one of your key suppliers goes into liquidation in the next financial cycle. How disruptive would that be to the overall workings of your company and what would you do to minimise that?

Those are some of the possible dilemmas that business owners have to face on daily basis, and decisions always have to be made with the company context in mind. What can you afford to do? What would be the most beneficial? Is an immediate payoff more desirable, or are you betting against the clock? At LORIC, we help beneficiaries answer those questions every day – what is more surprising is that sometimes, the answers we give them are not at all what you would expect.

Here are some of the hidden costs that businesses may not fully realise they are running up:

Not having a robust sick leave policy

Poor management of absenteeism and presenteeism could lead to drop in productivity, drop in morale, and an increase in the employee turnover. Think of it this way – if you are somebody who is conscientious about their work, would you enjoy having to do overtime to cover for someone who is constantly taking hangover ‘sickies’? Or, to go the other way, would you be comfortable staying in a company that penalises employees with disability or chronic illness?

Being sick is a part of life, and not one that can always be planned for, but as an employer, you want to take care of your team – regardless of how healthy they are at each moment in time.

Not knowing the true value of your employees

In an SME, it is not uncommon for members of your team to each wear many different “hats” over the course of their employment. It’s not a straightforward process, particularly when you are in start-up mode. So what happens if one of those people becomes a carer overnight? Or they feel disgruntled because their pay does not fully match their job description?

You may think the easiest thing would be to replace them, but an employee is worth a lot more than their salary – they have skills and situational knowledge of the company that a new hire does not; they have relationships with customers, suppliers and funders that will take time to rebuild. Hiring and training a new person can take weeks, if not months, during which the rest of your employees would have to shoulder extra work, and you would have to take valuable time from your schedule to go through CVs and interview candidates. Sometimes, the long-term benefit of letting go of a disgruntled employee is an improved morale for your company; but making reasonable adjustments for others (like condensed hours or hiring an extra person they can share the work with) is at least three times less expensive than replacing them. The real question is – are you aware of the true value of your employees, and are you making sure they are looked after?

Not keeping your supply chains flexible

This depends on the type of business you run, but if the delivery of your product and service is contingent on certain raw materials, any disruption in your supply chain can have consequences. For example – let’s say you run an online-based business and you outsource website maintenance to a specialist in Australia. That person is someone you have a relationship with and who is crucial to your process. What happens if that specialist suddenly has to downsize his client list, or is otherwise prevented from doing the work he was contracted to do? You might lose sales. You might lose the trust of your customers. You might have to rebuild your business from scratch.

Having good relationships with suppliers is crucial, but over-reliance on one supply source makes you dependent on that supplier. And if your business is time-sensitive (you need to process orders quickly, you do not have the capacity to hold large amounts of inventory) your hidden costs can really hurt you.

Not securing key partnerships

Ditto if you rely on collaboration to deliver your product or service. If your relationship with the person you outsource your work to is that important, you need to make it worth their while to stay. That might mean paying more money and making them your partner, but it could save you a lot in the future. The question for you is: can you determine which relationships need to be secured, and which ones need to be kept flexible?

Not caring whether your customers trust you or not

Trust is one of those things that nobody thinks about until it is lost. Social media companies are feeling the effects now, with a raised awareness around individual privacy and a general air of mistrust around social media providers causing users to delete their accounts en masse. If your business relies on steady income from your customers, then you need to pay attention to how they perceive you, and to nurture their trust.

Not being smart about your marketing budget

It’s very easy to overspend on marketing, particularly if you rely on social media ads and neglect things like customer trust and word-of-mouth. Throwing money at something does not guarantee a return-on-investment, especially if a company has not done its research about who they are targeting and how.

Not understanding their competitors

Can you do too much market research? Yes – especially if you do not understand your own USPs. Some companies sink money in getting to know their competitors, only to find out later that their products or services are not comparable at all. Or, they assume that their product is so unique and interesting, it does not have any competition – neglecting the idea that parts of their offer might already be covered by other products and services, and that it would take time for customers to change habits (using one product instead of three others, or changing to a new service.) At any rate, it is important to know the market and the competitors, but not to waste money on research that does not help a company make the right decisions for itself. With any data report it is important to know – does this help us meet our goals? Does this give us information to make the right decisions?

Networking without a strategy

Too often, companies make a pitch to a funding body because they think they are supposed to, and neglect that the body is already overstretched, or that their history of grant application is not favourable to this type of business. Sometimes an offer is a hard sell not because the business is trying hard enough, but because the funding body is not the one to pitch to. Of course, that then means that the company has spent time and resources on a pitch that had a low likelihood of success. It is therefore important to evaluate an event, whatever it is, before attending – who will be there, would they be favourable to the pitch, and what can I do to turn the lead into a solid opportunity.

Not asking the right questions about finances

Where does the budget go? Ideally, companies can account for every penny, but that is not always the case. Having appropriate systems in place for logging expenses is important. Receiving appropriate advice about scaling those systems is even more important. A business that thinks about its future must also think about investing in the systems that can support them in the long run. For example: if a business is doing well, is expecting to operate in the next ten years, and has a large number of accounts being ran through fax or paper, it would make sense to switch to an electronic model as quickly as it can be afforded, instead of waiting until fax machines are obsolete. That does not mean splurging on the latest gadgets, but it does mean being aware of technology becoming obsolete, or knowledge becoming too fragmented, and acting accordingly to prevent future expenditure by implementing systems early and saving money.

Not investing in appropriate research and development

The first question that LORIC tries to answer, when working with a new beneficiary, is what kind of problem is that beneficiary looking to solve. Some beneficiaries come through the door with a specific question in mind, but even then it is important to get to the core of it – what is the real cause of the issue, and what can be done to support that beneficiary in solving the problem? In some scenarios, LORIC can help a client get to the core of an issue – what the problem is in reality, versus what they thought the problem was – and helping them target their efforts. But there are SMEs that spend a lot of time and money trying to solve problems that are, in the grand scheme of things, not as serious as they thought.

When choosing how to use research and development budget it is important to think not just about the market but also about the company. What is urgent? What is valuable? A good R&D project is both, but when an urgent problem presents itself, it must take precedence over what seems like a good idea for the market. (And trends can be their own tricky thing, tune in next time…)