Besides existing costs, businesses also face hidden costs that are difficult to determine and measure. In this article, let's learn with 1C Vietnam what the concept of hidden costs is, their classification and how to control hidden costs effectively.

1. What are hidden costs?

Hidden costs are costs that arise during business operations but are not officially recorded in accounting books. These costs are often not easy to quantify because they are not expressed in cash.

There are 3 factors that cause hidden costs: Outdated technology, non-optimal operating procedures, and human capacity. Businesses that promptly detect and control hidden costs can avoid reducing revenue and profits.

2. Illustrative example of common hidden costs

During operations, businesses often encounter hidden costs that cannot be directly accounted for, which may arise from assets, resources and business activities.

Asset

An example of hidden costs from assets is when an individual business owner uses the house he lives in for business. At that time, the living space area is reduced, affecting the quality of life of the householder. This is considered a hidden cost even though it is not convertible to cash.

Power

Hidden costs often arise when businesses have to use resources for purposes that do not bring business benefits. For example, when a business hires a new employee, experienced employees will have to spend time training this person. At that time, experienced personnel will have to take on two jobs: completing current work and supporting new personnel.

Business activities

Hidden costs in business operations often arise due to errors in the operating process. Specifically, when businesses sell goods, employees may miscalculate prices or confuse information. This leads to financial losses for businesses.

3. Distinguish between hidden costs and explicit costs in a business

Hidden costs and explicit costs are two different concepts that businesses need to understand clearly to be able to make accurate business decisions. Below is a detailed comparison table of the differences between these two types of costs:

Thus, hidden costs and explicit costs both have an impact on business activities and influence the investment decisions of businesses. While explicit costs are easy to measure and manage, hidden costs require careful assessment to avoid being overlooked and affecting business performance assessments.

4. 10 types of hidden costs that arise in businesses

Hidden costs are often difficult to identify and measure but can account for a significant proportion of a business's total costs. Here are 10 common types of hidden costs:

• Hidden quality costs: Are costs incurred due to unsatisfactory product or service quality. These costs are often not recorded in a business's financial statements but can cause significant financial, reputational and market share losses.
• Hidden costs of depreciation of facilities systems: These are amounts of money arising due to the facilities systems not being used at full capacity, including payments such as: Rent costs, warehouse costs, etc. Depreciation fees for machinery and equipment, maintenance costs.
• Meeting and conference expenses: Is the amount of money that arises due to ineffective meetings and conferences, including expenses such as: Organizational expenses, travel, accommodation of attending members, expenses time of the attending members, costs due to wrong decisions made during the meeting.
• Expenses for employees working overtime: These are amounts incurred due to employees working overtime including salaries, bonuses, insurance costs, benefits, energy costs, and materials.
• Idle resource costs: Is the amount of money incurred because resources such as human resources, machinery, equipment, materials, etc. are not used at full capacity. This type of cost includes items such as idle employee salaries, depreciation of idle machinery and equipment,...
• Inventory costs and slow turnover: When goods are left in inventory for too long and are not sold, businesses have to bear additional hidden costs including: warehouse rental costs, storage, inventory, damage, and loss. .
• Costs for departments that are difficult to control: In businesses, departments that are difficult to control such as back office, admin,... are where hidden costs arise. When there are no specific KPIs to measure effectiveness, these departments may have a situation where some employees often work late, wasting costs for the business.
• Cost of incorrectly arranged work location: Wrong arrangement of work location causes employees to waste travel time, reducing work performance. This leads to businesses having to bear additional labor costs. Common types of hidden costs include equipment wear and tear costs and inefficient production costs.
• Costs due to inaccurate forecasting of market demand: Inaccurate forecasting causes businesses to produce and import excess or insufficient goods, thereby leading to additional costs including inventory costs. , product shortages, order cancellations, discount costs.
• Costs due to poor distribution chain management: Issues such as damaged, lost goods, etc. in distribution chain management can cause significant hidden costs for businesses. Some common budget items include: Cost of damaged or lost goods, shipping costs, and customer service costs.

5. How to effectively control hidden costs

To minimize hidden costs that cannot be seen or measured directly, businesses need to take the following measures:

• Detailed analysis: Conduct detailed analysis of activities, processes and business decisions to identify hidden cost drivers. This helps businesses improve and optimize operations to reduce the amount of money incurred.
• Evaluate the value of the opportunity: Businesses need to consider other investment opportunities or business decisions that can bring greater benefits. Assessing the opportunity value of other projects or activities will help businesses ensure that hidden costs do not exceed the potential value that the opportunity brings.
• Effective resource management: Businesses need to ensure that their resources are used in the most effective and beneficial way. Businesses can consider using advanced technology, automating operations, and optimizing work processes to minimize waste of resources and labor capacity.
• Tracking and measurement: Businesses need to put in place tracking and measurement systems to monitor hidden costs. This helps businesses identify areas with large additional costs and make necessary adjustments to reduce this budget.
• Invest in employee training: Businesses need to ensure employees receive adequate training and skill development to perform their jobs effectively. This helps improve labor capacity and increase work efficiency, minimizing hidden costs of labor.
• Optimize business decisions: Businesses need to evaluate hidden costs carefully, supporting important business decisions that are made consciously and based on accurate data. Thanks to that, businesses can minimize risks and ensure more accurate business decisions.

Thus, hidden costs are a real problem that every business faces, and can cause significant losses. Therefore, effectively recognizing and controlling these additional costs will help businesses improve operational efficiency and improve profits. Don't forget to follow other articles on 1C Vietnam's website to update useful information about financial management for businesses!