Hidden Cost: Definition, Examples, and How to Deal With It

Building partnerships with visual asset providers can help sustain business success. However, hidden costs can be detrimental to this collaboration.

Hidden costs are expenses outside of the primary budget that, if not properly managed, can escalate to the detriment of the recipient. In this article, we will have a look at the hidden costs that are often part of the design process.

What Is Hidden Cost?

Hidden costs are unexpected expenses that can arise during a transaction or project. It's called "hidden" because it's often overlooked, either because of a lack of precision in financial planning or external factors like policy or budget changes.

Hidden costs typically amount to 1-3% of a company's revenue or potentially 30-40% of profits. If these hidden costs are not addressed, it could harm the sustainability of the business.

The Impact of Hidden Cost on Business

Hidden cost management is key to maintaining corporate financial health. Difficulty controlling unexpected costs can lead to decreased profitability due to hidden additional expenditures.

As a result, business growth will decrease and the viability of the business will be at risk. Financial uncertainty can also arise because of uncontrollable hidden costs.

Uncontrollable hidden costs can also disrupt a company's financial stability in the long term. Below are the negative impacts of hidden costs on business:

1. Disrupting Financial Flows in Business 

First, uncontrolled hidden costs can undermine the accuracy of data in financial statements. If your company stays caught up, it will experience financial uncertainty which can affect its stability.

This can hinder the efforts of a financial manager or a related division in long-term financial planning.

2. Difficulty in Making Decisions 

Hidden costs can also interfere with a company's ability to make business decisions. One attempt to overcome this is to change or decrease the costs that have already occurred.

However, this action could end up at a new hidden cost due to the extra time and resources required.

Furthermore, the cost can also be considered a sunk cost (a fee that has already been paid and cannot be refunded).

3. Decreasing Customer Satisfaction 

Hidden costs might lower the quality of your products or services. That could make customers feel unsatisfied and encourage them to seek out alternatives. As a result, the company’s revenue will fall and cause financial harm. 

If this issue is not resolved immediately and persists, it can negatively impact the company's productivity. Because of this, management and employees are forced to allocate extra time and resources to address this situation, which can hinder focus and work efficiency.

4. Decreased Business Profitability

Unexpected costs can also harm business profitability because unforeseen expenses can burden net profits. Business progress can be improved, and operational sustainability may be jeopardized if it is addressed promptly.

In addition, hidden charges may suddenly appear in large amounts, putting the liquidity and financial stability of the business at risk.

5. Decreasing Customer Confidence 

Unexpected costs of an uncertain nature can undermine transparency in business relationships. Customers may feel dissatisfied by finding unexpected prices that previously did not exist. 

There are hidden costs that give the impression that the company needs to be more honest in business. 

Knowing how to handle hidden costs is crucial to maintaining a well-established reputation. 

Benefits of Managing Hidden Costs Properly

Hidden costs not only occur in the financial aspects of a business but can also be found in a variety of fields, including the creative industry.

Managing hidden costs is the key to achieving long-term success. Here are a few benefits you'll get if you manage hidden costs properly.

• The budget will stay within the limit specified at the beginning. 

• Regular maintenance of the equipment used in design can improve efficiency. 

• Customer confidence is growing as a result of the ability to offer consistent and timely design results. 

• Increased profitability by lowering the cost of emergency equipment repairs and cutting unnecessary expenses. 

Hidden Cost Examples in Design Process

When dealing with large projects, hidden costs often appear and are ignored. These costs can have a significant impact on the project finances and timetable if not properly managed. Here's a common hidden cost in the design process.

1. Overtime Costs

These charges are often invisible but can accumulate rapidly. When employees are required to work longer than their regular working hours, they are paid overtime. Usually, when employees are required to work longer than their regular working hours due to an unexpected increase in orders or design requests, they are paid overtime.

2. Repeated revisions 

Whenever there's a revision, it will always take extra time to fix an existing design. Additional time will cause delays in project timelines, resulting in hidden costs due to project time extensions.

Furthermore, repeated revision can also reduce the design quality. Customers may feel unsatisfied which might result in losing a client or getting a bad reputation. 

3. Equipment Maintenance Costs

Equipment that is frequently used in the design process requires routine maintenance. If not treated properly, there may be damage that requires repair or replacement of components.

Make sure to maintain the equipment regularly. You must ensure that the performance of the equipment used remains optimal.

4. Delayed Production

Unexpected delays are a common source of hidden costs in production. Device damage or sudden customer requests can lead to delays, costing the company labor, materials, and other resources.

5. Advertising and Marketing Costs

Any newly-pioneered business will require advertising and marketing costs. These costs are necessary for a business to thrive.

Nowadays, the marketing process can be done easily, even without spending money. Businessmen can use different types of social media platforms and choose one that aligns with their target market preferences.

6. Tax Charges

Everyone in Indonesia, even business owners, is required to pay taxes. If you do not pay your taxes on time, you will be fined a considerable amount. To prevent losses, pay taxes as soon as possible on the due date.

7. Legal Fees

When you start a business, you must obtain a license and ensure that the business operates legally. As a result, some customers choose to use the service to take care of more expensive licenses that require less time and effort.

How to Avoid Hidden Costs in the Design Process

After knowing what is hidden cost, in this section, you will learn how to avoid them. To prevent hidden costs, you must conduct in-depth research before making a certain business decision or transaction. 

Here are some methods you can use to identify and avoid hidden costs easily and efficiently.

• Be sure to read the terms of the agreement closely. Make sure you understand the cancellation terms and any changes to the contract that may result in additional costs.

• When planning projects, always consider the possible risks. In other words, you must ensure that a portion of your income is an emergency fund to cover unforeseen expenses.

• Make a complete evaluation. This must be done to identify the weakness that caused the problem and prevent it from recurring.

Following the definition of hidden costs above, you should be aware of and minimize hidden costs to ensure the project runs smoothly.

Therefore, make sure to choose the right solution for the project being carried out. In this regard, VISUWISU as Creative as a Service (CaaS) provides solutions to the creative needs of businesses.

We implement strategies by creating creative designs and managing them efficiently using clear plans to prevent the potential for hidden costs. Contact VISUWISU now to discuss your company's branding needs!