Hidden costs can affect business bottom lines more than entrepreneurs realize.
For example, while cheques are an antiquated payment option that hasn’t been technologically necessary for most of this century, industry standards and vendor requirements often require small businesses to use them – and it could be costing them time and money.
Using physical payment methods like cheques could be costing Canadian businesses up to $4.4 billion a year, according to a C.D. Howe Institute report released in 2015.
Costs associated with physical payments add up quickly and can often be overlooked. A report released earlier this year by Plooto, a Canadian financial technology company, found that cheques could be costing businesses $9 to $25 per cheque.
The $25-per-cheque cost includes everything from the time it takes to write, deposit and account for the cheque to the postage needed to send it and the time it takes to receive and reconcile bank statements.
According to Plooto CEO and co-founder Hamed Abbasi, many small-business owners might not realize how much human capital is being used to handle cheque payments – time and effort that could be used more productively elsewhere within the organization.
“That was my job as the CEO of the company, to sit down with the bookkeeper at the end of the day, get the chequebook, get all of our paper invoices and manually write everything and sign everything,” Abbasi said on Business in Vancouver’s show on Roundhouse Radio. “I’ve never met a person who says, ‘I love writing cheques.’ It’s a really antiquated process; it doesn’t fit into the 21st century, so why are small businesses still using it?”
David Lee, financial adviser at BlueShore Financial, agreed that these costs can sneak up on small businesses and new entrepreneurs, but he said that if business owners are too hasty when switching from physical cheques, they may be hit with unexpected electronic transfer fees.
“These sources of payments like e-transfers also come at a cost for some [businesses],” Lee said. “If they’re not on the proper banking packages they may have to absorb some of the cost associated with an e-transfer.”
Lee also warned of credit card merchant payments and other transactional fees. These costs are necessary for sales, but also need to be accounted for in the price of the product or service.
But if suppliers or customers require cheque payments, their associated costs might be unavoidable.
To minimize payment delay costs, Lee said, it’s important for businesses to have a line of credit to ensure they don’t incur additional costs for NSF cheques or overdraft charges.
While many business owners consider the cost of labour while planning to start their business, many don’t consider associated costs like payroll management, direct deposit fees and insurance. Insurance for buildings and cars might be obvious expenses to consider, but liability and business insurance might not.
“[Owners] will usually focus on running their business,” Lee said. “So things like insurance are usually not at the top of their mind.”
Many new entrepreneurs will try to minimize these costs at the risk of their own business, but some insurance is better than none, according to Lee.
New entrepreneurs can also easily underestimate the cost of professional advice as well as obligations associated with setting up a business, such as fees for permits and licences, some of which require the professional help of an accountant and/or lawyer.
Another unexpected cost for many small businesses is maintenance. While upkeep of production equipment seems obvious, the need to maintain and update software may be less apparent. Businesses that are not capital-intensive might not consider the need and costs associated with technology.
Lease-to-own equipment financing rather than buying outright is one strategy business owners and entrepreneurs can use to reduce upfront costs. Leasing equipment might also provide a tax benefit. When buying capital equipment, businesses can deduct only a portion of the cost each year, over the lifetime of the equipment. By leasing equipment, businesses can deduct the full amount of the lease payment, which reduces their taxable income.
