The hidden costs of business

The prices a business charges its customers is based, to varying degree, on its costs.

At the lemonade-stand level, business costs are fairly simple to determine. Some companies don’t need much to do well and, in some cases very well. One of the reasons Warren Buffett is so fond of his venerable See’s Candies subsidiary is that it never needs an influx of cash to maintain predictably profitable. Translation: Costs are low.

As the size and scope of business expands, however, so does the complexity of the array of costs that companies must shoulder. These include everything from paper clips for the back office to complex risk-management strategies to protect the home office. Business travel, technology, research and development — it all adds up, and it all comes right off the top.

New business owners are sometimes surprised by the hidden costs of doing business, expenses like processing payroll, floor-mat laundering and signage. More experienced managers may be surprised that there’s actually anything left on the bottom line after all the myriad costs have been subtracted out.

Cost management often is synonymous with effective execution. Business leaders who understand how to control costs have a sustainable competitive advantage over those who do not, and close scrutiny of the budget can have an immediate positive effect on results.

To help you think about your own cost structure, we took a closer look at a few business expenses that often go overlooked.

In a retail atmosphere, nothing can hurt foot traffic like silence.

“[Customers] look for music in this kind of atmosphere,” Dani Lyden, owner of Fine Brewed in Coeur d’Alene, said over the clanging of dishes and the sway of Elton John’s “Rocketman” in the background. “Silence can stop you in your tracks. If patrons don’t have that sound, they’re not as comfortable as they could be.”

Local business owners mentioned two factors in choosing a music service: The first is a desire to avoid paying individual royalties, the cost a musician or publishing group charges for a business to play its song. Just as Barry Manilow charged State Farm for the right to play the “Like a Good Neighbor” jingle he wrote, artists and publishing houses earn money when companies licenses their music for commercial use.

Elton John, in other words, has a legal right to collect money from Lyden, because “Rocketman” is helping her business profit by drawing in or keeping customers. What once was charged as a per-usage rate (ranging from a dollar per song down to a nickel, depending on the artist) is now consolidated into a single monthly subscription that covers all royalties due. Cost depends on the service.

Lyden said her Sherman Avenue cafe goes straight to a publishing house. It uses a music-streaming service from BMI, one of the largest music publishing companies in the United States. The cafe plays music throughout its premises without worrying that a BMI artist will sue for unpaid royalties. It costs $80 per month. “It’s worth it,” she said.

Chad Foust, manager of Sweet Lou’s Restaurant and Tap House on Front Street in Coeur d’Alene, said his restaurant shopped around before choosing DirecTV. The satellite provider offers a royalty-free music option, and, because Sweet Lou’s also uses the provider for its big-screen televisions, it gets a better deal — about $40 per month, he said.

“In this business, you gotta pay for music,” Foust said. “It adds a major ambiance. You’d much rather have music than not.”

Foust said DirecTV also versatility.

“You gotta have something you can count on, and you gotta have something you can change if you need to,” he said. “Having different channel lineups gives us some flexibility to change the ambiance if we need to.”

While royalty costs and choice are two dominating influences in the music choices small businesses make, price often drives the final decision. Evans Brothers Coffee in Coeur d’Alene looked to go as low in costs as possible while still satisfying royalties. They found a way to cut costs through a challenge they turned into an asset: solving the music issue in two locations.

“The issue is, you have to pay a monthly royalty fee,” Austin Cooper of Evans Brothers at Fifth and Sherman said. “There’s no getting around it. We use Sonos, which costs us around $30 a month. But it covers both our cafes: here and our Sandpoint location. So we’re able to spread that cost and keep expenses down. And they give us the opportunity to [use] whatever channels we want.”

Lyden mentioned another benefit to the music solution: Fine Brewed plays music not only in their storefront, but in the kitchen as well. “We have another speaker in the back,” she said. “It really helps productivity. You get music going, the employees get moving, and it creates a better working atmosphere.”

Owners have to worry about royalty fees in more business spaces than just their lobbies. Customers call in to ask questions or place orders; those customers often hear hold music through their phones.

Most contemporary landline services offer business customers the option for hold music. To avoid paying royalty fees, those services often contract musicians to write and perform their own music in-studio, thus avoiding paying Elton John once again. For anywhere from $40 to $80 (again, depending on the provider), callers can listen to contemporary hits from an internet radio-like subscription (again, royalty-free).

Carrie Graham of Captive Audience says playing only hold music is a profit margin’s missed opportunity.

“There is a benefit to having just music for the caller to listen to,” Graham said. “They’ll know they haven’t been disconnected, so they’re more likely to stay on the phone. But if you’re going to have someone on hold, they may as well be hearing information that could benefit them.”

Employing its own royalty-free music, the Riverside, Calif., business crafts personalized messages for each client’s needs, from product information to promotional advertisements. From $45 and up, Captive Audience provides an opportunity for caller and company alike.

“It’s a marketing tool,” Graham explained. “It doesn’t try to sell a product as much as it starts a conversation, so when the caller talks to a person on the other end of the phone again, they can say, ‘Ooh, I heard about this,’ or, ‘Tell me more about that.’ It’s making the most productive use of the customer’s time as it benefits you.”

After nine years in business, Lynn Rinker knows where each earring and trinket and ladies’ hat rests in her store. She admits sometimes, though, that isn’t enough. “I don’t think you can ever really stop it completely,” she said. “People who are determined to steal are going to try to steal. That’s just the way it is.”

Shrinkage is an unfortunate cost — and fact of life — for many businesses. The origins of the phrase, “that’s the cost of doing business,” specifically mentions theft as one of merchants’ original hassles.

Rinker, owner of Memory Lane in Coeur d’Alene, said shrinkage in her store accounts for between 1 and 2 percent of her retail revenue, which lines up with the industry average of 1.47 percent. It’s the equivalent of a tax, and it comes right out of a company’s profits.

“[Theft] is something that needs to be calculated into your numbers,” Mark Rogers of Leatherworks on Sherman Avenue said. “But you also have to factor in the cost of equipment, cameras, the time to watch the video. In the end, if [the thief] makes it out the door with your merchandise, it doesn’t really matter. There isn’t really a lot you can do, at that point.”

Leatherworks’ products are sized, which can reduce a wold-be thief’s desire to steal for personal use. But Rogers said that doesn’t reduce the downtown stop’s shrinkage to zero. He still teaches employees how to minimize theft, which costs American retail businesses $44 billion each year. And it’s just the tip of the iceberg: Stopping shrinkage is only part of the cost. Prosecuting it is another.

“At some point, you have to ask, ‘Is it worth it?’” Rogers said. “If your cameras catch somebody [shoplifting], you might not see it until later in the day. At that point, if you call it in, and they catch the guy, do you prosecute? Do you close your shop and take time off work and lose business? It’s a hard decision.”

For Rinker, it’s not a hard decision at all.

“I prosecute shoplifters as far as I possibly can,” she said with a gleeful smile. “If you steal from me, I’ll make sure you pay for it. I’ll make sure you never come back to our shops. I’ll make sure every other store here knows your face.”

But Rinker — and others committed to deterring shoplifting as much as humanly possible—pays a price for that determination. She staffs an extra shift specifically to deter shoplifting, which increases costs. So Rinker utilizes contemporary tools to combat old-fashioned crime. There is, in other words, an app for that.

“I can keep an eye on things with my tablet,” she said, holding up her iPad. “From here, I can see from [the vantage point of] every camera we have. See? I can see the till. I can watch from home if I need to.”

More than 200 free apps are available on Google Play that promise to enhance security-video feeds. That, in concert with what Rinker said was a typical rapid response time from local law enforcement, gives her company an edge to prevent shoplifting and reduce the cost of shrinkage.

Both Rogers and Rinker agree, though, that the two best deterrents against theft is classic communication and old-school customer service.

“The best way for local business owners to prevent theft is to engage every single person that walks through the door,” Rogers said. “Let them know that you’ve seen them, and that you can identify them.”

“With people coming through everyday,” Rinker concurred, “you have to keep a close eye and make sure you’re providing great customer service.”

Merchants can help each other. The Downtown Association, Rogers said, provides more than a useful network of business leaders. It also gives neighbors a bond with which they use to look out for one another.

“The other businesses here are fantastic about that,” he said. “This is one of those ways in which the Downtown Association has been pivotal. If we capture video of a thief, we share that information. We communicate with one another. We realize that, if a shoplifter comes through one door, he’s coming through another one. We try and make sure everybody knows what to look out for, and who to look out for.”

— Craig Northrup

Sad but true: It costs money to pay people, whether a business outsources its payroll or hires someone in-house to take care of them.

Paychex, a national payroll, HR and benefit-outsourcing service provider, bundles popular services into its “Express Payroll” package, which starts with four employees.

The bundle starts at about $900 a year, according to Paychex Corporate Communications Director Laura Saxby Lynch. The bundle includes payroll processing, direct deposit, pre-loaded debit cards for employees lacking a bank account, new-hire reporting, an online human resources library, standard analytics and general ledger reports.

For a business with 20 employees, Paychex’s “Flex Select” payroll bundle costs about $1,500 to $3,500 a year, depending on the frequency of payroll. Weekly is the most expensive; bi-weekly is the most commonly used, according to the Department of Labor.

When it comes to hiring, costs pile up. Employment ads are a cost. So is meeting with prospective hires. Drug testing, fingerprinting and background screening — checking criminal histories — also adds to the cost.

A standard background check in Idaho is $65, according to Health and Welfare Public Information manager Niki Forbing-Orr. Enhanced background investigations, which delve a little deeper, cost more, and fees vary. Fingerprinting, which is increasingly required for licensed professionals, adds a $10 for the first card and $5 for each additional card.

In Kootenai County, background checks and fingerprinting can be done at the Department of Health and Welfare office, 1120 Ironwood Drive, Suite 201. Applicants must have their signed, notarized applications, photo identification and payment with them. Walk-ins are only available on Mondays. In addition to the background check, many employers also require prospective employees to pass a drug screen. Costs vary widely depending on the scope of the test; about $40 is a good rule of thumb.

Schools are businesses, too. When a teacher calls in sick, someone has to watch the kids: Teachers need backup in case they miss work. Those substitutes add an employment cost that administrators have to factor in just as their counterparts in the for-profit world would — if only it were so easy for businesses to simply call in a sub for the day.

“We pay the substitute/guest teachers $80 a day and long-term subs $85/day,” Post Falls School District Superintendent Jerry Keane said. “We have substitute coordinator who oversees the placement of substitutes. We also have a principal who trains all of the substitutes new to the district. Substitutes are hired as independent contractors.”

In the Coeur d’Alene School District, substitute teachers are paid $80 for a full day, $40 for working less than four hours at one building and $85 for working two half-days (a.m. and p.m.) and traveling to another building. Subs who work 16 days or more during the pay period are eligible for a $100 monthly bonus.

Those who sub for certified teachers in the same classroom for 10 consecutive full days earn $90 per day starting on the 11th day. Teachers who retired from the Coeur d’Alene School District receive $100 a day for a long-term assignment.

In the Lakeland School District, guest teachers are paid $87 per day or $92 a day for long-term positions beginning on the 11th day.

— Devin Weeks

General Motors spends more on health care for its workers than it does on steel for its cars. Local companies have endured the same rising costs for employee health care and other benefits as Detroit.

Teresa Benner, human-resources director for the City of Post Falls, said the city was still negotiating the cost of its fiscal 2020 health insurance — premiums that have seen steady increases in recent years.

“In the past 10 years, we’ve realized an 8 percent increase from year to year,” Benner said. An 8 percent annual increase doubles the cost in nine years.

Benner said the city and its employees share the burden of each years premium increase.

“For employees, increases run an extra $60 to $120 per year per employee” depending on which type of health insurance they choose, she said.

The city began self-funding its dental program several years ago. That made financial sense, though self-insuring against health-care costs — so far — has not. “We’ve looked at the numbers for self-funding the medical insurance every year, and it doesn’t pencil out yet,” she said. “A few large claims every year can have a huge impact on renewals for the next season.”

Benner said Post Falls has 178 employees who are eligible for the city’s insurance. The annual cost for medical and dental insurance runs about $2 million, which works out to $11,235.96 per worker.

Nevertheless, the costs yield results. Benner said offering good health insurance has remained a priority for the city because it helps retain and attract employees.

“Insurance is a part of the overall compensation we offer to qualifying employees and allows us to recruit more competitively in a very lean staffing environment,” she said.

Kootenai County will spending some $14.5 million on employee benefits this fiscal year. Health insurance consumes about 60 percent of that, or $8.6 million, and the Public Employee Retirement System of Idaho is paid $4.7 million.

In all, benefits consume more than 15 percent of the county’s $93.8 million total budget.

A total of 730 employees participate in the health insurance plan at an average annual cost per employee of $11,830, Darrow said.

Health insurance expenses grew by 67 percent or $3.8 million per year from fiscal 2009 to 2018.

“Health insurance-increase drivers included both the size and volume of medical claims,” Darrow said. “ A small portion of the increase — 5 percent — is due to new participants added to the health care plan.”

Darrow said the county absorbed more than 90 percent of latest health insurance increase.

“Employee portions of contributions have not increased for the employee’s health benefit, but have increased for the spouse and child coverage,” Darrow said.

— Brian Walker