Learn tips to effectively manage your business expenses by conducting a cost-revenue analysis, minimalizing departmental conflict, controlling overhead expenses
The success of any business depends on how effectively the owner manages expenses, especially for startups. Most entrepreneurs focus on improving their savings by cutting costs; however, managing business expenses goes beyond cost-cutting.
One study published at Harvard Business showed that most companies waste approximately 30% of their expenditure budget on things that do not add value to their customers. It indicates that managing business expenses requires more than a short-term relief from cost-cutting techniques.
Small business owners should know how to allocate the money at their disposal to pay for expenses. Startups with a lean and mean mindset and established corporations could benefit from good expense management. In this article, we outline proactive cost management steps for your business.
1. Know your business’ cost-revenue structure
Businesspersons need to understand what forms part of business expenditure and revenue. If you do not know what constitutes the actual cost of your business, you will likely not manage them.
As an entrepreneur, you want first to understand your sources of revenue. Know which products and services bring revenue to the business and how much. You also want to know the highest spending customers, responsible for most of your income.
This knowledge is essential in conducting cost-revenue analysis. The analysis will help you know the specific business expenditures impacting the revenue stream. Some costs are directly related to producing goods or services and could only be managed.
You also want to identify overhead costs that may not be directly involved in revenue generation. A clear understanding of your sources of revenue and types of business expenditure will enable you to work out a plan for managing these expenses.
2. Minimize interdepartmental conflict
Interdepartmental conflict within an organization can cause serious money wastage. This organizational confusion is likely to cause duplicate purchases and a deviation from the company’s true objectives.
As an entrepreneur, you do well to draw up your company’s workflow chart. A workflow chart will help you understand the inter-relation between departments and how they affect each other. For instance, you will realize how warehousing and marketing affect sales.
Since each department is affected by another, an entrepreneur should indicate the role of each department to minimize conflicts. A clearly outlined part will help personnel in these departments to examine how their decision help the company’s bottom line.
Once the workflow chart and roles are established, you could identify unnecessary costly steps in your operation and eliminate or merge them. A workflow chart will also help you question why specific actions are taken and how the business can do better.
Minimizing interdepartmental conflict also reduces business costs by enhancing employee retention. Top performers do not like working under confusion. Every department will pull in the same direction and increase revenue generation. Interdepartmental conflicts also hamper innovation and drain energy from your employees. You will effectively manage business expenses by keeping your house in order.
3. Control your miscellaneous expenditure
Do not underestimate small expenses; they accumulate and chip into your profits in no time. You want to scrutinize several miscellaneous expenditures such as utilities, insurance, telephone, and internet costs.
You will be surprised to know that between 15% and 20% of your organization’s spending is not managed correctly. For instance, what amount have you allowed various departments to spend on miscellaneous expenses without seeking approval from senior management?
If each department has a certain amount to spend without seeking approval, the total expenditure could equal the entire profit, leading to losses. You can keep your business expenses low by utilizing available apps and software.
Incorporating these expenditures into the budget will also help you not to go beyond set limits. Every department knows the amount they can spend in a week, month, or year. If something is necessary for revenue generation but not in the budget, they can seek approval.
If treating employees to lunch or breakfast was not factored in the budget, use your money to motivate them. Jumping into the company’s revenues, especially for startups to celebrate, may not be good.
4. Embrace Modern Technology
One proven way to reduce business overhead costs is adopting technological devices. The internet, computers and mobile phones have made managing a business easier, and you can take advantage of these.
Technology has made it possible for businesses to complete transactions online, conduct teleconference meetings, and open-source software, thus reducing expenses.
You can also manage business expenses by eliminating landlines and embracing mobile phone usage. Mobile phones, VoIP, and virtual phone lines are cheaper and easier to use than landlines.
Technology has also made it possible to go paperless, meaning your business will not need to spend on paper, ink, and other related stationeries. Instead of printing letters, you can reduce the cost of paper, ink, postage stamp, and space by using convenient and cost-effective digital docs.
Furthermore, you can adopt automated processes in your business to reduce personnel costs. If a machine can perform the work faster and efficiently, you can automate the process at a reasonably lower cost.
5. Create a budget and stick to it
A budget is needed in managing personal and business expenses. Without a budget, you will run blind, and your business will likely come to a halt. A budget is a roadmap that guides you to the desired financial destination.
It helps an entrepreneur to know their incoming and outgoing cash flow. You need a budget to determine unnecessarily expenditures worth cutting off and which ones to keep.
However, the challenge is sticking to the budget. Some entrepreneurs override their budget and spend beyond the stipulated amount. If you want to keep business expenses at a minimum, you want to be disciplined with your budget and stick with what it says.
Small businesses and startups should keep a weekly or daily budget for day-to-day operations. These businesses need a close grip on money to grow since a slight deviation can hinder their everyday operations.
If you notice sudden changes in your business budget, address them immediately.
6. Educate your employees on cost-management
Business costs are sometimes the results of your employees’ actions. You can educate them in team-building, problem-solving, and decision-making to effectively control their own costs.
Trained employees will likely want to help their companies succeed in managing costs. If you invest in your employees by training them in recession, they will work towards helping you manage business expenses.
Furthermore, you can involve your employees in your business cost-management process to bring them up to speed with your cost-reduction strategies. They could offer practical suggestions that the business can implement. Since the employees establish a cost-reduction system, they will quickly follow through.
Departmental heads will instruct new employees on the organization’s strategies to manage expenses, enabling everyone to help with cost reduction. This way, you will minimize wastage in your business.
7. Master negotiation skills with your vendors
Supplies from vendors can significantly increase your business costs. However, you can bring this cost down with good deals if you have good negotiation skills. You can negotiate several service costs, including transport, insurance, and health costs.
You can also reduce your general costs by paying vendors using corporate credit cards instead of checks. Using corporate cards can earn points or miles that you could use to pay for more expenses.
Negotiation with vendors can also reduce your professional fees. Instead of hiring a company lawyer, you can use part-time freelance lawyers. They may charge a fraction of what you could have paid a full-time employee on retainer.
As a business person, negotiation skills are a must-have to help your business save money. The rise of the cost of living and inflation has pushed operation costs high, but you can still negotiate better business deals. In the long run, you want to make a profit by minimizing costs.
8. Be creative with space.
Office rent can be a menace to your budget. It is one of the most expensive elements that build up operational costs. You can sublet it to cover your office costs if you have ample office space.
If you are moving to a new office space, you can share with another office, thus allowing you to share the overhead costs. Evaluate your need for office space and make wise decisions.
Can some of your employees operate from home? Do you need to downsize by letting some of your personnel go? These are some questions you can consider when considering reducing your office space.
The Bottom Line
Managing business expenses is an art that every entrepreneur should master to realize profits. You can take specific actions or combined actions to reduce your operational costs. Ensure your employees are educated and involved in your cost-management strategies.
What business management strategy have you implemented in your business? Which one do you plan to incorporate in the future?