Hidden costs of doing business in Jordan
By: Bank Al Etihad
Tags: Entrepreneurship, Taxes, Startup, Bank Al Etihad, Business

You’ve accounted for the salaries and rent, the production and marketing costs. But have you considered payments to tax consultants and municipalities? What about social security and licensing? Make sure you understand that starting and running a business has hidden costs that need to be budgeted.

Costing for a new business typically includes space requirements, marketing costs, licensing fees, travel, and staff salaries. However, entrepreneurs sometimes neglect to account for the hidden costs of doing business, which can include everything from having to hire a consultant to acquire approvals for a new concept that may not be in the list of legal businesses, to payment delays, and cost of time and opportunity costs.

At the same time, shrinkage, the term for loss of inventory between its purchase from your supplier and its purchase by your customer, also comes into play in businesses such as e-commerce.

While a small business may save on certain costs — staffing, or space requirements, for instance — many other costs, including debt costs, are the same for small businesses and large corporations.

NOT ALL COSTS ARE SMALL

Ali Tabbalat, CEO of Amman-based micro-lending platform Solfeh, said that it is not cheap to start a business in Jordan, because a company would need to pay a lot of fees upfront for registration, drafting of agreements, dealing with lawyers and tax authorities, social security, premises and other requirements.

“Those who are handling the process, be it in the government or the private sector, don’t really differentiate between a large company and a startup,” Tabbalat said.

Plus, a business needs to take into consideration the fact that they may not always be paid on time, leading to cash-flow issues. Many clients operate with 30- or 60-day payment terms. For example, if you have invoiced for a certain amount, and you want to bid for a project that requires a bid guarantee or registration fees, you may assume that payments from one project will flow into another. In the case of payment delays, however, you may end up taking a loan, and you will pay the cost of servicing it. This cost will be the same whether you are a small or a large business.

DIY TAXATION vs. TIME IS MONEY

Jordan, which is now ranked 75 (from 104 in the previous year) among 190 economies in the World Bank’s 2020 Doing Business report, has announced several SME-friendly initiatives. One of the initiatives announced in 2018 is electronic filing and payment of taxes and other mandatory contributions.

While the move simplifies procedures and reduces the time and money businesses spend on complying with fiscal obligations, entrepreneurs find that hiring a tax consultant leaves them free to pursue business opportunities.

Rola Fayyad, founder and CEO of ViaVii, a Jordan-based tour guide app for the MENA region, said that costs of tax consultancy should be factored in by startups and SMEs. “We all have retainer agreements signed with tax accountants and auditors in case anything pops up. This issue is global.” she said.

Having an auditor may be a hidden cost in the short term, but in the medium or long term, it will serve you well to have clean, audited accounts that stand up to scrutiny.

LEGAL CONSULTANCY

Legislation and regulation directly impact the way small and large businesses operate. The new ways of doing business — often called “disruption” — are an uncharted territory for regulators. For an entrepreneur this means not only winning over customers and securing funding, but also acting to fill the gap between demand, supply, and regulation.

For instance, the food truck business coming into the region or Careem’s entry paving the way for ride-sharing services, have meant complex regulatory changes. This adds to the time-to-market costing. The business cannot start earning until the consumer has started using it.

Another reason to have a good legal consultant is to protect yourself if you experience disputed payments. Many businesses will ask in their first or second year if it’s worth it to pursue a client who has not paid you. Are you better off spending that time making more money and bringing in new business? A large company would have a credit controller for just such a purpose.

If you have already factored in legal costs into your start-up, a debt collection agency may be able to salvage most of your dues for a fee. “I believe a lawyer and accountant are never too expensive; it’s essential for startups to hire the right ones,” said Fayyad.

SET-UP COSTS

Globally, gig work and home-based businesses are being encouraged in the new economy. Keeping pace with these developments, Jordan has announced a business package to encourage small home-based businesses and freelancers to register as legal entities. Similarly, many countries have introduced smoother set-up and closure processes.

While this means that the set-up process is simpler, it’s by no means fool-proof. Many startups go through multiple iterations of their initial business before they settle on a structure that suits them, their partners, business model, and investors. For instance, a company may be set up in a free zone but may decide to create an on-shore entity to serve clients that demand it.

A startup may find itself paying a consultant to prepare legal documents for everything from name approval to license and court fees. A government is responsible for ensuring that rights are protected and all vendors paid off before a business shuts down. It may serve you well to keep in mind that shutting down a business would require advertising in a newspaper three times and getting clearance documents from various ministries.

If you have only taken into account the license fees as your startup cost, this hidden cost may surprise you.

BE PREPARED FOR SUCCESS

If your business costing depends on your staying small, you’re probably doing it wrong. A small business needs to consider costs with success in mind. You may be able to operate out of your garage to begin with and put in working hours that include all weekends and holidays, but if you plan to succeed, the costs are likely to go up.

The garage office may not be able to accommodate your staff. Plus, if you are under a certain cap for social security, the cost will dramatically increase once you cross that threshold.

Fayyad has encountered this first-hand. Reflecting on the first day she decided to set up in Amman in 2016, she said the costs were mainly basic startup registration fees and costs. But then, as the company and team began to grow, they were overwhelmed with the amount of costs they were not aware of, including shrinkage costs, employee benefits and perks, social security, and tax consultants.

“As a startup, we usually have limited funds, and cannot add all the staff to social security, which deducts an average of 14% from the employer and 7% from the staff. Hence, we have to pay income tax of around 5% to 10%,” she said.

While the taxation structure for start-ups is under review, she still needs to account for social security. “If we had a salary budget of 15,000 JOD per month, we have to pay 2,100 JOD for social security,” she said.