Smart Ways To Manage Your Small Business Expenses
By Business Desk
Sunday, April 16, 2023.
Stastiscs have shown that one in five businesses fails the first year. A major factor that contributes to the demise of several small businesses is the mismanagement of finances. In building your business and achieving its goals, you need to spend money; these transactions are known as expenses. Since expenses are incurred in running your business, they can lead to great profits or incredible losses. Therefore, ensuring you have a tight grip over your expenses is vital to maximising your profit margins and cash flow. Fortunately, this article can help you do just that with the tips below.
Create a budget
Image Credit
Budgeting is one of the oldest yet most effective ways of keeping track of your money. For businesses, simply creating and sticking to a budget can ensure it doesn’t collapse in the foreseeable future. With regard to managing your expenses, a budget gives you a better overview of your business’s daily expenditures and unexpected costs it may incur at a given time. It also guides you on how much your business has or can allocate to catering for these expenses. To draw up an effective budget, list the business’s vital and recurring expenses and estimated costs. Next, disperse your expenses over the amount allocated for them. If your expenses are more than the amount budgeted for it, you need to make some changes. On the other hand, if your expenses are within the amount of money allocated, you should ensure you stick to the budget to avoid financial mishappenings.
Categorise your expenses
The truth is, as a small business, you will spend money on several aspects of your business. There are several advantages to categorising your expenses. For one, you can better plan and track your expenses. It also makes it easier for you to draw up your budget. Additionally, knowing which category an expense falls under prevents overspending or spending unnecessarily. Most importantly, it helps you identify your business’s spending habits and find proactive ways to resolve them. Your business’s expenses usually fall into two categories: recurring and one-time expenses. Recurring expenses include phone bills, utility bills, rent, internet bills, and payroll, to name a few. These are expenses that the business incurs daily, monthly, or yearly. One-time expenses are those payments your business needs to make just once. For instance, permits and licences. Therefore, when categorising your expenses, be sure to carefully identify your business’ recurring and one-time costs. You can consider hiring an accountant to assist in this to prevent avoidable mistakes as they are more experienced in this area.
Renegotiate contract terms
Image Credit
From renting your office space to paying insurance, your business has core expenses it cannot ignore. Although these expenses are vital to the daily activities of the business, you may find them financially draining, in some cases affecting profitability. Fortunately, you can resolve this problem by reviewing these agreement terms and finding ways to renegotiate terms for a more cost-effective option. For example, instead of leaving your insurance package to review automatically every year, you can take time to review the policy to determine if your business still needs various elements of coverage. Doing this would prevent your business from the coverage it wouldn’t benefit from while saving you cash. Another area you can also consider renegotiating is your rent. If your business uses a rented office space that it barely uses, you can consider renegotiating for a lower rent. You can also consider downsizing your office space. This is usually more beneficial for businesses where various operations activities can be carried out remotely. Downsizing would mean fewer people in the office at a given time. This, in turn, reduces the expenses incurred, saving you more on your expenses.
Diligently track your transactions
Another effective way of managing your expenses is by keeping track of them. You can do this by keeping copies (both the original and digital copies) of your receipts, invoices, and other proof of payments. If you have a fleet of vehicles, solutions such as Coast fuel cards can also help you control and track spending. Keeping track of your business’s expenses in this manner helps you stay on top of cash outflow, preventing you from overspending. You can also identify unnecessary costs that may harm your business’s finances more than good and develop accurate strategies to avoid them. Additionally, you ensure your expenses are accounted for during tax season or an audit on your company, preventing legal issues.
Open a separate bank account
As a small business owner, you’re likely running your business under a sole proprietorship or partnership business structure. A common issue that arises from these business models is the mingling of your personal finances with that of the business. By opening a separate bank account for your business, you can monitor its cash inflows and outflows. It also ensures your business’s expenses are well organised, making it easier to identify issues on time and implement appropriate solutions. Be sure to create a savings and checking account for your business. This way, you can keep the money allocated for the growth of the business separated from what should be used for daily expenditures. It is also advisable to get a bank card. In addition to making it easier to keep track of payments, bank cards also provide safety. These cards prevent you from carrying or storing large sums of money on you or on business premises.
Choose the right accounting strategy
Accounting is a significant aspect of your business’s financial setup. This area is responsible for tracking the business’s cash inflow and outflow, incurring compliance with the law, creating its budget, and forecasting profitability and losses. It also has the responsibility of managing the expenses the business incurs. Your business’s ability to manage its expenses largely depends on its accounting strategy. In managing expenses, two forms of accounting strategies are used: accrual and cash basis accounting.
The main difference between the two strategies lies in when the expense is realised. Accrual accounting is the strategy that records the expenses of goods and services before your company makes the payment. Under the cash basis accounting method, expenses are recorded once they have been paid for. Several small businesses choose the cash basis accounting method as it is simpler and easier to track your expenses using this method. It also requires fewer staff or experts to carry out the accounting tasks under this method, saving you money on related expenses. Once you have selected an accounting strategy that works for your business, you must stick to it. Consistency is vital in managing your expenses. If you should suddenly switch or switch occasionally, this would put your records in disarray. You may also face severe repercussions during auditing and compliance checks. As a business owner, you may be tempted to also include managing the accounting of your business in your roles, but this can be overwhelming. Besides, if you do not have knowledge of or experience in accounting, you may be making some harrowing decisions for your firm. Hiring or outsourcing the services of an accountant is an excellent idea to ensure the job is done well.
Explore automation solutions
In attempting to manage your expenses, investing in technology may not seem like an option your business would not be considering. However, this can go a long way to ensuring that your costs are well managed. One of the perks of technology is the convenience it offers through automation. Automation is the technological phenomenon that reduces the need for human intervention in the completion of various tasks, usually repetitive, by doing so itself automatically. For your small business, investing in such technology can help you reduce associated expenses such as utility bills or even salaries (as you can afford to have fewer employees to get the job done). Automation also assists your employees, helping them complete tasks in a fraction of the time they usually would spend— increasing their level of productivity. Even for your accounting, you can take advantage of accounting automation solutions. This makes it easier to manage, organise, and monitor your expenses, especially if you need to handle the accounting tasks on your own if you do not have or cannot afford an accountant.
Carry out periodic audits
Image Credit
You need to review your expenses periodically to stay on top of them and manage them appropriately. Carrying out periodic checks or audits on your expenses gives you an idea of your cash outflow as compared to the inflow and helps you find ways to remedy to avoid issues in the future. It also helps you attract investors as you can efficiently calculate your profitability and forecast the growth of your business in a given time. In addition, you keep your expenses well-organised when you carry out periodic checks, a factor that draws investors in. When conducting periodic checks, analyse and examine all reports, receipts, and other transactional documents. Take note of trends, huge expenses, and how the expenses accumulate.
