5 things you should know about costs before you start a small business

By Morgen Henderson

The difficulty of starting a business surprises many entrepreneurs. They don’t expect the time needed or the level of stress they’ll encounter. In fact, few appreciate what the first month of starting a new business is really like. With the pressure and excitement of starting a small business, it’s easy to overlook common expenses. And if you’re not prepared, these unanticipated costs will (at best) slow your growth or (at worst) bankrupt your company. Here are five business costs to remember when estimating your small business budget.

Office space costs

Whether it’s a coworking space or your own home, you will incur office space costs. Even if you already own your home, you still have maintenance and construction costs if you decide to remodel. It’s likely you’ll need to invest in more office equipment, like an extra computer monitor, bigger desk, or a more expensive cell phone plan.

And then there are always utility costs. Coworking spaces often roll the cost of electric, water, and garbage into your monthly rent. And with a home office, you can expect your utility bills to increase. Follow easy energy efficient home tips to help reduce utility bills and take advantage of tax deductions for small businesses. You can deduct portions of your mortgage, utilities, and upkeep expenses from your taxes to save money.

Business insurance

Because small businesses tend to have fewer legal resources, they are popular targets of lawsuits. As you first begin to grow your business, you may have little need for business insurance — unless you’re in a high-risk market. But if your business takes off, you’ll need several types of small business insurance to protect your investment. For example, property insurance protects your equipment from damage or theft. And if you have employees, you will need workers’ compensation insurance.

Lawsuits can come from anywhere. If your services or products injury someone either physically or financially, you may be liable for the damage. If you misrepresent a competitor’s product or service (even inadvertently), they can sue you for loss of profits. In that case, having advertising injury coverage would help protect your small company.

Business insurance isn’t cheap, so work with an insurance company that specializes in small businesses to find the policies that best apply to you.

Professional services

You’ll need the help of professionals that specialize in legal and financial matters.


Lawyers help small business avoid paying out frivolous lawsuits and wasting time going to court. Small business lawyers can also keep you from getting into legal hot water in the first place. They can advise you on copyright laws, privacy laws, and slander. Court cases cost you in time and legal fees, but also expect your insurance premiums to increase after a settlement. Look for free or low-cost legal resources before committing to a specific law firm or attorney.


Unless you want to spend time balancing books and filing taxes, you’ll need to pay a CPA or bookkeeper to do it for you. These financial service professionals are expensive, but they help keep your payment records accurate, your inventory correct, and your quarterly tax filings on time. If the government ever audits you, you’ll want these financial professionals in your corner.

Employment taxes

When you work for an employer, they pay your employment taxes to the IRS. But as a small business owner, you’ll be responsible for paying them yourself. Business taxes include federal, state, and local (if applicable). The federal employment taxes you’re responsible for are your personal income tax, Social Security and Medicare (FICA), and Federal Unemployment Taxes (FUTA) if you have employees. You’ll need to estimate your taxes and pay them quarterly.

FICA taxes surprise many new entrepreneurs. Normally, your employer pays half of your Social Security and Medicare taxes. But as a self-employed business owner, you’re now responsible for the entire amount. FICA is also known as your “self-employment tax rate,” which runs at 15.3% (12.4% Social Security, 2.9% Medicare). Make sure to include this extra cost in your monthly budget.


Shrinkage is business-speak for common inventory losses. Examples of shrinkage include shoplifting, shipping errors, damaged products, and paperwork mistakes. Anything that lowers the value of your inventory is shrinkage— and it can cut into costs quickly. Although shrinkage may seem like the “price of doing business,” it doesn’t mean you can’t manage the problem.

Record expected shrinkage and make a plan to counter it. If shipping errors will damage your business, offer free shipping for customers. Or upgrade to priority shipping for a more dependable service. If you see employee theft as a problem, invest in a video security system. You’re going to have shrinkage. The point is to reduce it as much as possible.

Don’t forget personal costs

There are plenty of other “hidden” small business costs that are more personal than these five. For example, you’re about to spend an inordinate amount of time devoted to growing your business. Your time is money, so factor that loss into your personal budget. Also, you no longer get paid vacation days or sick leave. These losses add up over the year. And if you’re still contributing to your retirement fund, you’ll need to set aside monthly contributions. No more employer pensions or matching 401k contributions. In the end, your business’s success will likely depend on the personal costs you have to pay. So, treat yourself well, and your business will grow.


Morgen Henderson lives in Utah and loves to travel. She has experience in the family entertainment industry, where she’s worked since she was 16 years old. She loves her job and all that comes with it!

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