In the United States, there were 30.2 million small businesses as of 2018, which collectively employed 47.5% of the private sector workforce, according to the Small Business Administration.
Every year, an average of 6.5 million new businesses are started, but a lot of them don’t survive for long. In fact, one in 12 businesses close their doors each year, according to the U.S. Bureau of Labor Statistics.
Unfortunately, only about half of all small businesses are likely to last at least five years, the SBA says. Only a quarter of all small businesses are able to last for at least 15 years.
While competition from other companies in the industry as well as outside forces are some reasons why businesses fail, one of the main contributing factors is a failure to properly manage expenses. Just as not managing personal expenses can lead to mounds of debt and financial ruin, doing the same in your profession can lead to the same outcome.
Here are five ways that you can better manage your company expenses.
- Understand Your Expenses
It may sound surprising, but a lot of small business owners have trouble managing their expenses because they don’t have a true grasp on what their actual expenses are. The first step, then, is to understand what your obligations are, and then understand costs as they relate to revenue.
Your company will have consistent monthly expenses such as rent/mortgage payments, utilities, internet and phone, and possible equipment leases. You’ll also have payroll costs, which may or may not fluctuate each month depending on your structure.
To truly manage your company expenses, though, you need to understand and track your various revenue sources and the costs associated with them. Break down all of your revenue by category based on the products/services you sell, figure out who your top customers are and then track how much it costs to produce that revenue.
The further you can break this data down, the better. If, for example, you can figure out that it costs 50 cents to produce $1 in revenue for Product A but only 10 cents to produce $1 in revenue for Product B, then you can focus your efforts on selling more of Product B. In the long run, this will not only make your company more profitable but help you to control unnecessary expenses.
- Examine Your Structure
Payroll is the largest cost for most small businesses. One of the easiest ways to manage your expenses, then, is to curtail your spending on your workforce.
In no way does this mean you should start cutting employees left and right. While they are your largest categorical expense, employees are also your most valuable asset.
So, what do we mean, then? An effective way at managing employee expenses is examining your organizational structure. Some questions to ask include:
- Do you have too many managers and not enough entry-level employees? This top-heavy structure can often result in higher-than-necessary payroll expenses, and potentially less output.
- Are you overloaded in one department and under-staffed in another? This can result in people running out of work in one area, and paying expensive overtime in another.
The key is to achieve a nice balance — among levels and departments in your company. This will allow you to optimize your payroll expenses.
- Shop Around for Vendors … and Negotiate
It’s impossible for a company to operate effectively without having vendors and suppliers. Even the smallest of companies have a vendor to provide them internet service, for instance.
Getting the best price you can for the services you need is a great way to manage your expenses. When you’re searching for vendors for the first time, shop around and get quotes from a handful of companies. Then, when you’ve whittled that list down to a few, negotiate to see if they’ll lower the price of their service.
Even if you’ve been in business for a while now, you should look at your current vendor contracts and shop around for better services. If you’re happy with your current provider and don’t want to switch, there’s no harm in asking for a reduction in price for extending your contract.
The key is making a list of all your vendors with the contract details. Then, two or three months before each contract is up, contact the vendor to discuss renewal at a better rate.
- Be Flexible
It’ll always be to your advantage to be flexible with your expenses. In good times, this will allow you to scale up quickly in response to a new big customer or a big order. In challenging times, this will allow you to scale down your services a bit without having to lay off workers you need.
Some examples of how to do that include:
- Leasing your office space instead of purchasing it
- Going month-to-month or quarter-to-quarter on certain service contracts (or at least having the ability to alter the details, if need be)
- Structuring some employees’ compensation at least partially around performance instead of high guaranteed salaries. This works especially well for the sales department.
Ultimately, it always pays to establish good relationships with the people you do business with. It’ll pay off in the end when you need their help in being flexible.
- Be Disciplined
Managing business expenses takes dedication, discipline and attention to detail. You either need to have all of these qualities yourself, or you need to hire someone you trust who has these qualities to handle expenses for you.
Accounts payable shouldn’t simply issue payments to vendors without reviewing and cross-checking bills/invoices with the contractual services provided. Honest mistakes can happen during billing, and these mistakes can be very costly if you just pay invoices without looking at the details.
In addition, your company should meticulously review employee expenses to ensure what they are submitting for reimbursement is accurate, honest and necessary.
Finally, take the time to review your expenses on a monthly basis. Did you spend what you expected to spend? Was it more or less? And why?
These are just five ways in which you can more effectively manage your business expenses. If you start with these, you’ll be much better prepared to grow your profitability and weather any storms that may come your way.