Paying attention to the small things can often times be the difference between success and failure of your business. I often refer to this as “death by a thousand cuts”. As business owners, we’re often so busy paying attention to the big picture and focusing on the obvious, that we lose focus of all the small issues and particularly the small expenses that affect our business. Ultimately losing sight of these can be the death of your company, thus the term “death by a thousand cuts”.
When putting together a budget or business plan, we always start with the obvious. In the case of a product company (like Wicked Good Cupcakes), we first start with our product line. We determine how much it costs us to create a product and then determine how much we can sell it for. From this we can derive our profit margin on a particular product. We then figure out all of our operational costs (rent, payroll, utilities, etc). We subtract that from our projected product sales profits to determine our overall projected profit. For many people, this is where it ends. For me however, this is just the beginning. It’s time now to “look under the rocks” and figure out all the hidden expenses that your company is likely to incur. For each business, these will be different. What I’d like to do today is give you some examples of hidden expenses that affect us at Wicked Good Cupcakes.
Shipping – we are essentially an e-commerce company which means we do a lot of shipping. With shipping comes a lot of added expenses that you may not anticipate. For example, each time a customer provides an incorrect address, UPS will try to resolve that address and redeliver the package. For that redelivery, UPS will charge the shipper (WGC), $12.00. We do validate addresses when they are entered on our website, but putting 100 main street instead of 10 main street is still valid. However, if the intended recipient lives at 10 main street, the package will have to be redelivered and you will be charged.
Related to this are packages that are sent to recipients that no longer live at the provided address. For these packages, UPS or Fedex will return the package to the sender (WGC). The cost of which will be billed to the sender’s account. It’s basically like you’ve sent the package twice. Once to get there and once to get back, and you pay for it. On top of that, the client will then often request a refund (even though they provided an incorrect address) and since our product is perishable, we’re out that cost as well.
Now it may not seem like much, but I can tell you that approximately 1 in 200 packages we send require some form of address correction or are sent to someone who is no longer at that address. The cost to us? Approximately $8,000 per year.
Shrinkage and dead inventory – If you’re a product company, you’re going to have inventory. Not just product inventory, but things like packaging inventory, labels, etc. Shrinkage refers to items that are lost or damaged for one reason or another. For example, last year a water heater in an apartment above our Cohasset location blew up. As a result, water rained through our ceiling and drenched a bunch of our packaging rendering it useless. Now you might say “Insurance will cover that”. Not necessarily. Even if it does, you probably have a deductible that you must first meet. On top of that, anyone that has had to file an insurance claim knows that often the filing of a claim will lead to increased premiums moving forward.
You may also find yourself holding onto dead inventory. We’ve had flavors that we’ve tried that didn’t really sell that well. Since we bake based on orders, we didn’t have lost product, but we did end up with labels we’ll never use. This may only be a few hundred dollars worth of labels, but do this 10 or 15 times and it’s now a few thousand dollars worth.
Other small expenses you may overlook
- Professional services – at some point during the year, plan that you’ll need at least a few hours of attorney or accounting services. Depending on the size of your business this can easily add up to several thousand dollars.
- Lost revenue due to weather, website problems, etc. – It will happen. This year in the Northeast, we had a record setting winter. Our Faneuil Hall location was closed for 5 days due to snow (the first time in 15 years that Faneuil Hall was closed due to weather). Not only did we lose expected revenue, we also made the decision to pay all our employees for those days even though we were closed. Total cost to us including lost revenue – approximately$7,500.
- Maintenance and repairs – if you have any equipment, you’ll have to replace, repair or buy more updated equipment. Budget 10% annually of your total equipment cost for repair, maintenance and replacement. Even if you’re a one person show running your business from your laptop, you’ll eventually need new software, your laptop will die or need to be replaced, or you’ll crack the screen on your phone.
- Refunds – inevitably you’ll have customers that just aren’t happy. No matter how hard you try, mistakes will happen. When they happen, you need to make them right. Whether you refund or reship product at your cost, this is an expense you need to plan for. Obviously you’ll continuously try to bring this number down, but it will never be zero.
- Payroll – Often times, when people budget for payroll they figure it like this. I need to fill 200 hours per week at an average wage of $15.00 per hour. Therefore, my payroll expense will be $3,000 per week. Not so fast. You have the employer’s portion of payroll taxes to contribute, unemployment insurance, worker’s compensation insurance and possibly other benefits. Depending on the level of benefits you’re going to offer, it’s going to cost you between $1.15 and $1.30 for each dollar you pay your employees. So in our example above, that $3,000/week payroll will really cost you between $3,450 and $3,900/week. On top of that, you will probably want to budget money for bonuses throughout the year (holiday/year end, incentive, etc). Once again, depending on your company, this could be anywhere from 1% to 20% of your total payroll.
And, if you have payroll, this will mean you may want to hire a payroll company to handle it (it’s worth not doing yourself – if for no other reason than being sure all taxes and reporting are being done properly). Not a huge expense, but an expense none the less.
- Office supplies – paper, pens, staplers, tape, staples coffee, snacks, etc. This stuff adds up.
- Building maintenance – Even if you rent your space, you may be responsible for such things as periodic HVAC service in your unit.
- City and State town fees, licenses – these add up quickly. Yearly fire inspection. Health department inspection. The variety of state licenses and annual filing fees. These are all different depending on your business, but they add up quickly.
- Trash removal – this may or may not be part of your lease. Same is true for things like snow removal. For WGC, this is part of our lease. However, if the management company exceeds their annual budget for snow removal, we are liable for the overage (this is common in most triple net leases). This winter, that overage cost us nearly $3,000 – that’s a lot of cupcakes.
- If you deal at all with food, you’ll deal with waste. In fact, you’ll spend every waking hour trying to minimize it. Bottom line is food goes bad. You need to buy enough food and supplies to meet demand, but not so much that it goes bad. As hard as you try to minimize it, you’ll never eliminate it.
- Credit card fees – this is a big one that a lot of people overlook. If you take credit cards (and most everyone does), this is a real expense. Each credit card payment you take will cost you between 0.5% and 5% of the transaction. There are a lot of variables at work here (type of card the customer uses, who you use for credit card processing, etc). Do your research and find a processing company that gives you a good rate. Any time I hear someone tell me they are going to simply use Paypal, I cringe. Paypal charges an extremely high fee compared to a direct processing company like Heartland. These fees add up fast. As an example, if we used Paypal instead of Heartland, it would cost us an additional $50,000 – $60,000 annually just in fees!!!
These are just a few of the more obvious examples. The key is to dig deep into your company and anticipate what other “hidden expenses” you need to plan for. It may seem like common sense, but you’d be amazed how many companies overlook or don’t consider these in their budgeting. Then they can’t understand why they’re operating in the red. As I said before, individually, each one of these may not break you, but collectively they will. It’s death by a thousand cuts.