How to Manage Business Expenses?

23 Mar How to Manage Business Expenses?

Properly managing your business expenses is key to improving your cash flow and making sure that you are spending money where it matters – turning a profit. Here are some tips on how to manage business expenses:

Know your expenses

For you to manage your business expenses effectively, you must first be able to identify what these are and how these relate to your primary revenue-generating activity. Are these variable expenses change when your sales or production changes (ex. cost of raw materials)? Or are these fixed expenses do not change whether or not you generate sales or produce goods (ex. rent)? How are these expenses necessarily contributing to revenue creation? Will reducing costs lead to reduced revenues as well (ex. advertising)? Understanding the nature and purpose of your expenses will help you analyze and control their movements as you plan and perform your business activities.

Keep good records

Keep your receipts and other business documents, and use these to account for your expenses accurately and timely. Keeping good books will enable you to generate reliable financial reports (ex. Profit and Loss Statement), and help you in your analysis and decision making. This will also be beneficial when you need to prepare your returns when the dreaded tax season comes.

Create a monthly budget

Based on your understanding of the behavior of your expenses concerning your revenues, you can prepare a budget for the coming periods. You can start by forecasting your planned level of sales, and then you can plug in the corresponding figures for your variable expenses, plus your fixed recurring expenditures. Historical financial results can provide insights on trends or seasonal movements which you can then use to project future costs (ex. sales increase by 5% each year). Or you can start from zero, and build up your budget based on your analysis of your actual and justifiable business needs for the upcoming period.

Track, measure, and reassess

If it’s not measured, then it can’t be managed. Track and review your actual expenses versus your budgeted levels, so you can spot problem areas and take immediate corrective action. Periodically assess the business reason/justification for incurring the expenses and see if you can slash costs without hurting your revenue-generation capabilities. Benchmark with your competitors or the industry average to identify areas where you may be spending more, and get ideas on where you can avail of more cost-effective alternatives. Invest in technology that would help you monitor your expenses, such as cloud-based accounting software.

Identify areas for cost savings, such as:
Fixed costs – Consider turning some fixed costs into variable ones to give you more flexibility (ex. implementing a commission-based salary to sales staff instead of paying a fixed monthly rate).
Vendor contracts – Review your suppliers regularly and check if there are others who can offer better deals. You can bid out costs and get vendors to compete for your business.
Discounts – Negotiate and request for discounts. Purchase in bulk to avail of quantity discounts.
Supplies – Go paperless and save on stationery expenses. Cancel unnecessary subscriptions or services.
Energy – Conserve energy by turning off lights or equipment when there are no people around, or by making use of sensors or timers.
Travel – Save on travel costs by using web conferencing technology. If business trips are unavoidable, don’t overspend on luxurious accommodations.
People – Consider outsourcing or using interns instead of employing full-time staff.
DIY – Learn something new and do it yourself instead of paying a consultant.