Update your expense control systems: part 1
Have you ever been surprised by cash flow and profitability problems such as late payment penalties, eroding profits, or low cash balances? If so, you are not alone. Many business owners lack the time or systems to track expenses and closely manage profits in a challenging marketplace. In other cases, success brings on expense control problems. It’s common for a business to outgrow the financial and reporting systems initially set up.
An important part of your bottom line.
Updating your financial systems can affect your bottom line by making it easier to enforce budgets and reduce unnecessary expenses in less time. This is important because:
- Expenses directly impact your profit margins and the choices you make about what to sell, how to sell it, and how to deliver it;
- Expense management helps you improve cash flow and creates additional working capital that you can choose to invest or hold onto as retained earnings to fund the growth of your business.
This is a business owner’s job.
Many business owners ignore or delegate the job of managing expenses to focus on sales, product development, and customer service. But budgeting and controlling costs are high return activities for a business owner. Managing costs and margins is generally a more predictable and controllable way to grow profits than growing sales; and only the owner of a business can provide the leadership and business judgment to make cost control happen.
So, how do you increase your control over spending?
Here are eight smart ways that the most profitable businesses cut, budget, control, and manage expenses. Taking these practical actions today can increase your control over your expenses.
1. List and benchmark all of your costs.
List all of your annual costs – or assign your CPA to do so – then benchmark what you pay or spend vs. industry peers to identify expense categories you might cut, restructure, or put out to competitive bid.
2. Identify your strategic costs and cut the rest.
Strategic costs are the things that make or save you the most money, like customer service. Unless something is directly linked to product quality, excellent customer service, profitable new sales, or a feature or service that gives you a defined competitive edge, consider it overhead and try to cut it aggressively.
3. Never let expenses become routine.
Periodically look at non-strategic costs seeking savings opportunities. Search a couple of non-strategic expense accounts each month for expenses that can be removed or cut. Assume that you are spending too much.
4. Put all your costs up for grabs.
You will find a number of expense control opportunities if you assume all costs are not necessary until proven otherwise. A best practice of profit-oriented executives is to ask one simple question before they make any decision: Do I have a good business reason for doing this? Embracing that philosophy will save you money.
5. Know your sales costs.
Your sales costs can be as high as 20 cents on every sales dollar if you add up salespeople, advertising, marketing, travel, entertainment, and product collateral. To make sure these funds are spent wisely, calculate your selling costs on a per-customer, per-product, and percent of revenue basis. Then reallocate your sales resources to where they will generate the most profit.
6. Buy in bulk & receive over time.
Try to take advantage of volume discounts on favorable terms by buying in bulk and receiving delivery over time while stocking and paying only for what you need.
7. Join a buying group.
Join a buying group or pool of buyers that negotiates volume discounts on services, supplies, and health care.
8. Buy more with cards.
Use business credit cards and commercial cards to get customized reports that track and manage expenses by category, employee, and time period. Pay early to qualify for vendor discounts if it makes sense, and save money with discounts and rewards.
Where to go from here.
Managing your business expenses can pay off big time, but to stick with it, you’ll need to set up processes that are smart and efficient. In part 2 of this 3-part series, we look more closely at benchmarking, budgeting, and systematizing: Regain control of your spending. Increase your profitability.
Alison Fairbanks, is a messaging strategist and copywriter in Minneapolis. For more than 20 years, she’s helped build some of the nation’s top brands through strategic, creative communications. Her current mission includes bringing her big-brand expertise to small-business owners who think big. Find her at prefixbrand.com.