Whether you went into your business with open eyes or have been kicking and screaming about the parts you don’t like, expense management is essential to keeping the lights on and creditors (and the tax man) away.
Failing to manage your expenses could leave you continually spending on unneeded subscriptions that automatically renew. You could wind up short of funds at the end of the month and have to carry a credit card balance at a large interest rate. Or you could wind up with a tax debt you can’t pay and the IRS knocking at your door.
Reconciling your expenses is at the heart of managing them. Reconciling simply means comparing two things to make sure they match. For instance, comparing the receipt for the computer you bought and the credit card statement for the card you used in the transaction. Or your credit card statement and the bank statement for the account you used to pay off the card balance. When you do this, you have a sense of what’s going on with your cash flow.
Avoid the bad. You can spot things that can really hurt you, such as fraud or identity theft, or catch small math errors before they become bad ones. Invoices are less likely to be lost. You’re less likely to wind up paying late fees. You’ll reimburse employees before they’re hurt financially or harbor a grudge against you. You’re less likely to find yourself facing an unexpected expense. And, since one of your key expenses is paying your estimated taxes to the IRS, you reduce your chance of penalties for underpayment or late payment of those estimated taxes.
Embrace the good. With up-to-date and accurate expense records, you can make better decisions about a range of issues — everything from hiring to new products to taking time off. You may even discover money you didn’t think you had, meaning you can pay down debt or set aside funds for future business growth. If you’re going to borrow for growth or to cover expenses for your slow season, well-kept expense records will smooth the process.
Related: Don’t File and Forget: Use Your Receipts to Gain Insight on Business Spending
Embrace these five strategies to go from “survive” to “thrive”
Commanding expenses is especially important for a small business. Imagine a bakery that doesn’t know what it spends on flour or a freelance web designer with more professional memberships than time to use them. Expense management is more challenging for a small business; they typically have a small staff, which means that everyone is stretched. Distractions are greater and space — real and cyber — can be limited, making it easier to lose things.
These five expense management strategies will keep you on track and move you from struggling to overcoming:
1. Budgeting
Budgeting is central to expense management. Budgeting sets guardrails for how your business should run. By comparing (reconciling) your spending goals for important categories against what you actually spend, you stay up-to-date on the financial state of your business. These will differ based on your business but will include things like rent, supplies, employee expenses and utilities. Compare your spending to your budgeted amounts for a specific period (say monthly or quarterly).
The simplest way to do this is to list your budget items on the left side of a notebook page or spreadsheet, and then enter the actual expenses to the right. Add a third column showing the difference between your budget and your actual expense from your cash receipts, credit card statements and checking statements. Prioritize which categories are most important. Those that are essential — such as coffee and sugar for a coffee shop — will need more attention than those that are simply nice to have, like a television for customers.
2. Identify cost centers
Expenses may be important because they’re big (say, rent) or because they’re critical to performing your work (for instance, your internet bill for a programmer or a web developer). Marketing could be important because while it creates customers, it’s easy to fly out of control if your strategy includes pay-per-click or pay-per-impression internet advertising. Cost centers can indicate a spending problem when there’s too big of a variance from the usual expenditure, or they can indicate that your business is either growing or starting to decline. By tracking your spending and its return on investment (ROI), you can identify products or processes that aren’t paying off internally. If your marketing ROI is too low, you may elect to back the trend to self-serve buyers and drive your sales through online experiences, using fewer sales reps.
3. Outsourcing
Administrative tasks you pay someone for may be better outsourced online. These could include payroll, data entry, bookkeeping, web design, marketing, call centers and even human relations (HR). Or you can try to handle them yourself with software-as-a-service (SaaS) vendors. Start with your biggest expense, but anything that improves profitability should be looked at.
4. Establish office procedures
When you’ve determined your course of action, you need to routinize it. If you’re a sole proprietor, write down what you need to do, then do it. It may even help to pretend you’re reporting to someone else (even if you went into business to be your own boss). Consider “accountability partners” who keep you on task. If you have employees, document your procedures. Include when they’re to be done — for instance, Tuesday is payroll day and Thursday is inventory day. Include who does it and detail all of the steps.
5. Make technology your friend
According to the U.S. Chamber of Commerce Technology Engagement Center, since 2020, those small businesses showing higher use of technology showed higher growth in sales, profits and employment. Just keep the first four strategies in mind when adopting helpful technologies.
Related: 10 Tax Law Changes You Need to Know to Save Your Business Thousands of Dollars
Total mastery
You must accurately capture your transactions for any expense management structure to function. Audit what you do and revise any of the above procedures if they don’t work or in the event of change. Whether through growth, lost business or outright disaster, things will change. These will affect all of the above and require new budgets, cost-center decisions, outsourcing needs, office procedures and technologies.
When you first implement these five strategies, your persistence will be rewarded. Profitability will increase as you systematically reduce costs — especially those that don’t help generate revenue. The process may be slow and fraught with missteps — whether you make a poor outsourcing decision or take a while to turn Wednesday into bookkeeping day — but with your eye on your goals you’ll soon find yourself master of all you manage.
Read the full article here
