During the holidays or any time of year, it would be great if you could run your company without spending a penny. But we’re not nuts, and neither are you! (Although some might argue that the holiday can make anyone a tad unstable.)
Business expenses are just the reality of, well, doing business. However, the difference between successful entrepreneurs and ones who can’t make ends meet is how they manage their business expenses. This is especially true for small to medium-sized enterprises (SMEs) with thin cash margins.
At PayPie, we give you the tools you need to monitor performance and forecast cash flow so that you can see how these costs affect your bottom line. We also wrote this post so that you can understand some of the mechanics behind business expenses.
More than 1/3 of SMEs struggle with business expenses
If business expenses weigh heavily on your mind, you’re not alone. According to the Center for Financial Services Innovation (CFSI), 36% of small businesses find it hard to cover the costs of basic operating expenses. This is often because, in many industries, revenue barely exceeds expenses.
Understanding the different types of business expenses
Before you can go slashing costs, you’ll want to be certain you understand the two main types of business expenses — fixed costs and variable costs. Both affect your bottom line differently.
Cutting one could mean the difference between positive and negative cash flow. Axing the other could mean that you walk into your office one day and the power is shut off.
Fixed costs vs. variable costs
A fixed cost refers to operating expenses that stay the same regardless of whether you’re producing 10 or 10,000 widgets. In other words, you don’t have wiggle room with these expenses – they’re non-negotiable sums that must be paid.
If your factory lease costs $1,000 per month. It’ll cost the same no matter how large your production run.
Examples of fixed costs include:
- Rent or mortgage
- Salaries (non-hourly workers)
Utility bills are also considered a fixed cost. Not only are these costs you’ll have to pay, but they are, for the most part, relatively consistent from month to month, or follow cyclical patterns that enable you to predict how they will affect your bottom line.
On the other hand, variable costs are expenses that have a direct relationship with production quantity. If you make wood furniture, the cost of wood will vary depending on how many tables and chairs you produce.
Examples of variable costs include:
- Non-salaried (billable) payroll
- Marketing and advertising
- Production materials
Taking steps to control business expenses
Generally, you’ll be most successful at cutting back expenses if you focus on your variable costs. That’s just the nature of variable costs by definition – you can control what you’re spending by adjusting the quantity or volume you buy. That said, there are ways to work with fixed costs to mitigate their impact on your cash flow.
Step 1 — Identify patterns in your business expenses
Before you take any steps, you’ll first want to review your financial reports and performance metrics to see where your most common expenses are coming from.
In this case, your profit and loss (income statement) will be hugely helpful. If you have a tool that helps you evaluate your expenses, that will come in handy, too. (For instance, PayPie’s analytics dashboard will help you track your business expenses visually.)
Are you spending a lot on marketing and promotion? Are your raw materials costing you the most? Utilities? This is the first thing you’ll need to know.
Step 2 — Examine common cost centers (expense areas)
Need a little help categorizing your business expenses? Many expenditures generally fall under the same few umbrella categories: (Note, if you track them well throughout the year, you can also do a better job of claiming qualified expenses as tax deductions.)
- Rent (or mortgage) and utilities — This includes what you pay to keep a roof over your business and the power, water, and heat required to do your work.
- Equipment —For consumer goods or manufacturing companies, this might be a lot more explicit – literal physical equipment like lawnmowers or trucks. But, computers and desks also count as equipment.
- Office supplies — Following from that, you might stock your office with reams of paper or fridges of drinks.
- Payroll and wages — This comprehensively covers both staff salary and hourly wages, and you can include benefits in here, too, if you’d like. You might find it helpful to subdivide this category depending on your type of business.
- Marketing and advertising —Digital and physical campaigns to promote your product or service.
- Professional services — If you pay a bookkeeper or accountant, a leadership coach, consulting firm or any other professional service, categorize it here.
- Interest — Interest payments for things including small business loans and credit card payments are a category unto themselves. Principal payments should not be counted here.
- Travel and entertainment —Also just referred to as “T&E”, this includes things like dining, flights and mileage, client dinners and more.
- Theft and loss — Shrinkage is an important category to take into account, too. You also might need to consider if you’ve needed to expense inventory to things like disasters or unforeseen circumstances.
Although this isn’t an exhaustive list, you’re likely to find that many of your business expenses fit within these categories.
Pick an area where you want to focus on cutting back.
After you understand where you’re spending, it’s important to realize that you’re not going to be lowering every place you have expenses — there’s no such thing as a quick hack. That’s not what you’re here to do. Instead, the goal is to make meaningful trims where you can to give you a larger positive cash flow buffer or to get you closer to positive cash flow.
Effective strategies for managing business expenses
Now, let’s talk strategy. Here are a few ideas:
1. Hone in on process and workflow
Many expenses come from workflow redundancies, outdated processes and other inefficiencies. This could mean that multiple people are unnecessarily ordering office supplies, or you’re keeping around utilities, such as landlines, that you no longer need to get business done.
Evaluate your business processes — especially those that involve variable costs — and you might be surprised to find opportunities to chip away. You might be able to even put a dent in fixed overhead expenses if you can find a better, cheaper alternative.
2. Know your cost-revenue structure
How do you make money? What’s not making you money? If you really want to start cutting costs, you need to intimately know the relationship between your expenditures and your revenues. If you’re able to identify the costs that aren’t directly related to your sources of income, you should be able to scale back without noticing a decline in earnings.
3. Review your balance of contractors vs. employees
Is your business better off hiring contractors or employees? It’s a nearly impossible question to answer universally, but you certainly can answer it for your business. Each comes with benefits and drawbacks. If you find that you’re spending a lot on billable hours, or a ton on benefits, you might need to do a cost-benefit analysis of your staff structure.
4. Understand benchmarks
After spending this much time with your expenses, you might want to take some time to see where you fall relative to industry peers. How do your expenses compare to other similar businesses, both overall and by category? You might be able to get this information from professional associations or personal connections.
5. Scrutinize your operations
Why are you using the raw materials you’re using — is it because customers have asked for them and they’re the most eco-friendly, for instance? Or is it because you just sort of always have? Why are you in the office space or storefront you’re in — do you have a definitive answer?
These kinds of questions aren’t easy to answer, but they might be where you can find your biggest savings, especially with costs you thought were fixed.
6. Look for inefficiencies
When you’re spending on marketing, are you keeping your budget consistent throughout the year, or really maximizing during seasonal interest in your product or service? Another thing to keep an eye out for is to make sure that your inventory numbers are up to date so you’re not spending on production or inventory when you are already flush with stock.
Managing small business expenses always comes back to having a strong grip on your cash position. What are you paying for? When are you paying for it? Are you paying more now than you did before?
The only way to understand how expenses are actually affecting your cash flow is to have a good system for recordkeeping and one that helps you understand your real-time cash flow, too. (60% percent of small business owners who fail blame cash flow. That’s huge.)
Get the big picture
PayPie helps you track your cash flow in near-real time — including your small business expenses visually month-over-month so you can really see what you’re spending.
Connect your business and start monitoring your expenses today!
The information in this article is not financial advice. This content is general while every financial situation is unique. It does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.