Business Library

Identify hidden business expenses

Hidden business expenses are costs that are difficult to predict. Such costs can sink a young business, so every effort should be made to anticipate them. In any event a contingency sum of about 20% of sales revenue should be set aside to meet the unexpected. If you have anticipated every cost then you have a useful reserve to go into the next financial year with. The list below covers some of the most common hidden expenses:

The legal costs of incorporating your business. These can range from a few hundred to a few thousand pounds
Insurance costs to protect business assets and provide public liability insurance, this covers people in your office or factory. If a visitor or someone who works for you is injured on your premises then you are liable.
Insurance to cover the cost of dealing with a VAT or tax enquiry. If the tax authorities are either unhappy with your accounts or pick you out at random for a full inspection, you will have to meet substantial extra costs for accountants fees. Without insurance these will fall to you
A bad debt occurring if a customer fails to pay or is unable to pay. Accounting rules allow you to show as income any invoiced amounts, but that does not always mean the money will actually arrive
Meeting fines on the business for such items as unfair dismissal
Registering patents, copyrights and trade marks to protect intellectual property
Goods in transit insurance to cover your products on their way to a customer
The cost of providing for the replacement of fixed assets. Although items may be new when you start out in business, one day they will have to be replaced
Petty cash transactions for stamps, taxis and so forth

Many other hidden expenses are known in name but not in amount. For example, until your quarterly telephone bill comes in the exact amount is not known. You do however know that the telephone is being used. The same is true with heat, light, power, fuel, and vehicle maintenance. A process known as 'accruals' deals with these hidden expenses. It is possible to make provision for these in your accounts to meet costs when they become due.

Action Checklist:

Using this list and after asking your business network for their advice, try to anticipate any hidden expenses
Set aside or accrue an appropriate amount to meet each expense

This is a guide. It may be helpful for you to speak to an advisor in business finance. E&OE