Study Reveals The Cheapest Place To Run A Business

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Study Reveals The Cheapest Place To Run A Business

Pack your bags, we’re off to Budapest. A recent study by business utilities comparison service, Utility Bidder, found that the cheapest OECD city to run a company in was the Hungarian capital, Budapest. In terms of outright costs, it came out on top of the overall league table, even if it’s not cheapest in every category. This is in large part because of its incredibly low corporation tax in Hungary, but also comes down to other factors.

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The Cities With The Cheapest Business Costs

But how does Budapest compare with the rest of the world? What factors make it the cheapest, and what cities should you think twice about setting up a business in?

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Business Costs

The study looks at a number of key costs that businesses will face, whether they are a start-up or a more established company. These include the average yearly wages, the cost of an average office rental, utilities like electricity and internet plus corporation tax. It’s shocking how  much the costs of these can fluctuate around the world and, while it’s not the only thing to consider, it’s worth keeping them in mind when you’re looking for somewhere to run your company.

Business Costs

Average Salaries

So let’s take a look at what the study found. While average salaries may not be something you want to compromise on, as paying for the right people often means paying a little extra, there are a number of places where the average wage can be particularly attractive for employers. Mexico City, for instance, has an average yearly salary of just £13,000. On the flip side, Zurich in Switzerland has a yearly average salary of £85,000, and some cities in the US, like New York City and San Francisco, aren’t far behind.

Business Costs

Average Office Cost

Finding the perfect office space that balances your company’s image, employee’s wellbeing and location can be tricky, and in some cities, it can really cost. With average prices as low as £15.04 per square foot in Palma De Mallorca, it’s hard to look past the warm seas and sun-soaked beaches of the Spanish island. This is the cheapest OECD city for office space, and when you consider some of the other benefits it’s an attractive option. Other Spanish cities are cheap too, like Malaga and Valencia whereas in New York City you could be shelling out an average of £159.14 per square foot. That’s quite the difference, and it’s worth working out whether that prestigious address in NYC is worth it for your business.

Running your office is another expense. It’s all well and good to get a great deal on your office space, but if your amenities are too high it just won’t be cost-effective. The price of your electricity and internet connection could make it an unrealistic option. Fortunately, there are a number of cities where these are fairly cheap.

Electricity

Electricity Cost

In terms of electricity Seoul, in South Korea, has the cheapest at just £0..06 per KWH. Not far behind them are the big Canadian cities, like Toronto and Vancouver who offer electricity at an average of £0.07 per KWH. This makes running your office incredibly affordable, whereas the Portuguese cities of Porto and Lisbon have potentially prohibitive electricity costs, with an average of £0.24 per KWH. That really adds up.

Internet

Internet Cost

In addition to electricity, you really need to think about your connectivity costs. Business broadband is essential for any modern company. With that in mind, being able to pay the lowest price possible can be attractive. This is offered in Warsaw. The Polish city has an average business broadband cost of £138.24 a year. Budapest is similar, offering an average price of £146.76 a year. Some American cities really take connectivity costs to the extreme though, like Atalanta, which sits bottom of the league table with an average price of £745.32 a year, just to connect your business to the internet.

Corporate Tax

Corporate Tax

All of these costs combined are good to keep low, but if the corporation tax in a country is high, it could make that cheap office and amenities feel a little less rosy. While you can’t necessarily look at corporation tax alone, as governments often add other fees too, it’s a good figure to use when calculating potential costs. Budapest’s 9% corporate tax rate is drastically lower than any of the other OECD cities. Corporation tax is set by country, rather than just city, and the UK’s 19% tax rate places all of its cities joint second in the list.

It’s this low corporate tax rate that helps put Budapest at the top of the overall league table for cheapest OECD cities to run a business. When the study took all of the costs associated with running a business and created a normalised score out of 100, Budapest was miles ahead with an overall score of 90.72. This includes a low average wage of £15,600 a year plus office space and amenities towards the bottom end of the scale. Other cities that placed well were also in eastern Europe, like Prague with 83.9 and Warsaw, at 82.20.

At the other end of the spectrum, you’ll find cities that are incredibly popular for businesses, despite their high costs. The OECD cities at the bottom of the list are both from the US, San Francisco with a score of 38.89 and New York City with 39.87. After these comes Tokyo, with 43.43. The three cities are incredibly popular and important within various industries, despite these costs. In fact, the high wages in San Francisco and New York City in particular likely help them attract the best employees possible. Other costs do add up though, so you need to think about whether you really need an address in one of these expensive cities.

Conclusion

These are just a few of the costs that can make a city cheap or expensive to run a business in. Read the full report for a better idea of which cities may make a good home for your company. It’s always worth considering a wide array of things when you’re trying to figure out the best place for your office. Just because one particular cost is low, it doesn’t mean it’s the best place for you. The team behind the report, at Utility Bidder, can help you find the best deal on the amenities your business needs in the UK.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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