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During the holidays or any busier time of year, it would be great if you could run your company without spending a penny. But in the real world, we know there isn’t a magic switch to flip.
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. Managing your business expenses effectively is a key part of business crisis management and can make all the difference in keeping your company afloat.
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)
- Insurance
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
Effective strategies for managing business expenses
Now, let’s talk strategy. Here are a few ideas:
Cut costs by fixing workflow inefficiencies
Many expenses come from workflow redundancies, outdated processes and other inefficiencies.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.
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.
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.
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.
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.
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.
Streamline your cash flow with Forwardly
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 truly grasp how expenses are affecting your cash flow is to have an excellent system for recordkeeping that provides insights into your real-time cash position. Forwardly can help streamline your cash flow by reducing your accounts receivable (AR) to zero and ensuring timely management of your accounts payable (AP). You’ll benefit from affordable instant payments, free bill payments, and free cash flow forecasting tools. With Forwardly, you can keep your financials in check and focus on growing your business. It’s absolutely free to get started with Forwardly.
