There are two main variables that will determine the profitability of your business: the revenue you have going in and the expenses you have going out. If you can retain control of these two variables, your business can continue operating successfully. Unfortunately, there are many other variables to consider. If you don’t manage them properly, it could lead your company to failure. Here are some ways to manage those major business expenses that impact all types of companies.
Let’s focus on the “expense” side of the equation. Here’s what it takes to manage your expenses effectively:
- Reducing expenses. When most people think about managing expenses, reducing those expenses as much as possible comes to mind. It’s a good strategy. Every dollar you save on expenses (while maintaining the same standards and operations) is an extra dollar of profit.
- Understanding and forecasting expenses. You also need to understand what your expenses are and how they work. For example, you should be able to predict your recurring costs. Plus, you should project how those costs might change over time. This allows you to keep your cash flow positive and make better sales goals. Ultimately, you can effectively chart the future of your business.
- Strategically taking on expenses. Managing expenses means taking on other expenses, provided they’re valuable to you. For example, you might invest more money in a new marketing campaign if it promises to return new sales.
Let’s take a look at some of the major categories of expenses you’ll take on and how you can manage them more efficiently:
1. Wages and benefits.
Without a team of employees, your business won’t last long. If you’re just starting out, you’ll need to first decide who’s going to be on your team and what responsibilities they’re going to handle. Using Glassdoor or a similar salary index, you can calculate the going rate for each role you plan to hire. Estimate the cost of benefits you’re going to pay. This could range from next to nothing to tens of thousands of extra dollars a year. Keep your costs low here by only taking on the people you need to get the job done. Also, use independent contractors and other part-time help to cover anything else.
2. Rent (or mortgage).
Aside from staff costs, this will be your biggest predictable expense. If you’ve purchased a building outright, that means making a mortgage payment and paying property taxes. If you’re renting, you’ll probably pay a flat rate. Even a small business can expect to pay several hundred to several thousand dollars a month in rent, depending on your area. Keep your space small and away from heavily populated areas or consider the option of subleasing your commercial space.
Your business probably needs equipment, whether it’s a multi-million-dollar manufacturing piece or just a traditional copier/printer. that means spending at least several hundred dollars on initial equipment. Save money by finding devices that provide multiple functionalities in a single package or by buying used equipment rather than new. Make sure you understand the decreased life expectancy and/or performance of the used equipment.
4. Utilities and office supplies.
The ongoing monthly costs of keeping a business open can also eat into your budget. Here, you’ll need to plan for things like water, electricity, gas, internet, and basic office supplies that include pencils, pens, and paper. Reduce utility costs by “going green” and installing more efficient equipment and occupying a smaller space. Also, enforce strict standards on how and when utilities are used, such as mandating that all devices are turned off and unplugged at the end of the night. If you wanted to get extreme with shaving office costs, you could go paperless and keep your office clutter-free.
You’ll need to consider your office may become vulnerable to criminals. Additionally, you should be aware of the threat that cyberattacks pose small businesses. All it takes is a single compromised password to bring your company to its knees. Accordingly, you’ll need to invest at least some money in better security standards. Fortunately, modern camera systems are relatively inexpensive, and protecting your digital presence is as simple as better educating your employees and keeping their software up-to-date. These strategies are both cost-free.
6. Other losses.
Consider lawsuits, natural disasters, and sudden changes that halt your income stream. There are many types of business insurance available. Get any policy that protects your business from a viable threat. However, you can reduce your rates by getting your policies with the same provider and committing to safer ongoing practices.
7. Professional fees.
Though some entrepreneurs like the idea of trying to handle everything themselves, there are some areas where novices can do more harm than good. For matters relating to the law, taxes, or other complex disciplines, it’s better to hire someone who knows what they’re doing. That means paying a steep hourly rate or retainer fee. Fortunately, if you do some digging, you can probably find someone affordable in each area who you can trust for sound advice. Start by asking other local business owners who they use and why, then interviewing them to get their perspectives.
8. Marketing and advertising.
If you want your business to generate more leads, interest, and brand recognition, you’ll need to invest in marketing and advertising. However, not all strategies are the same. You can save money by focusing on the strategies most likely to give you a high return on investment (ROI) or those that work especially well for your industry. It may take some time for you to find these candidates through experimentation, interviews with other business owners, and research. However, it’s worth the investment if it means getting a better rate and a higher return.
9. Professional memberships.
Depending on what industry you’re in, you may be required to pay professional membership or association fees. Otherwise, you risk being outside the industry. You might need to pay to get certified in a certain discipline or pay a monthly fee to be a part of a registry or database. Fees range from minimal to egregious. Unfortunately, there isn’t much you can do to reduce those costs unless you plan to operate outside those set standards and group operations.
10. Travel, dining, and entertainment.
If your business involves traveling to meet with clients, pitch your company, or recruit talented people around the country, you might see significant expenses in the travel, dining, and entertainment category. You’ll need to reimburse yourself or your employees for when they travel to outside locations, take clients out to dinner, or even discuss business at entertainment events like sports. Keeping costs low here is a sacrifice. You’ll need to spend less money on fancy client dinners and substitute some video calls for in-person meetings. If it saves you hundreds of dollars a month, it may be worth it. This depends heavily on your industry, target market, and how much your business can afford to spend.
11. Repairs and maintenance.
If you own anything on behalf of the business, including your own building, your equipment, or personal devices like laptops, you’ll need to set aside money for repairs and maintenance. Preventative maintenance and proactive repairs tend to pale in comparison to the cost of major repairs and replacements. Work to find a reliable contact in each category who can handle these routine tasks.
12. Tax preparation.
Business taxes can be complex, covering multiple categories like income tax, estimated taxes, self-employment taxes, withheld taxes, and excise taxes. If you aren’t prepared for these expenses, they can take you by surprise. And, if you don’t pay them appropriately, you could get yourself in legal trouble.
These tips should allow you to budget for expenses more accurately, and ultimately reduce your operating costs. If you can do this consistently, while also increasing the amount of revenue you bring in, there will be nothing left to stop your business from becoming profitable. The more you learn and the more experience you gain in this area, the more intuitive it will become. Keep investing in your financial skills and always work to manage your money better.
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Author: Peter Daisyme