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Whether you started your business with your eyes open or you’ve been kicking and screaming about the parts you don’t like, expense management is essential to keeping the lights on and your creditors (and the taxman) away.
Failure to manage your expenses could leave you continually spending on unnecessary subscriptions that automatically renew. You may find yourself running out of funds at the end of the month and having to carry a high-interest credit card balance. Or you may find yourself with a tax debt you can’t pay and the IRS knocking on your door.
Expense reconciliation is at the heart of expense management. Reconciling simply means comparing two things to make sure they match. For example, comparing the receipt of the purchased computer and the statement of the card used in the transaction. Or your credit card statement and the statement from the account used to pay off your card balance. When you do this, you get an idea of what’s happening to your cash flow.
Avoid evil. You can spot things that can really hurt you, like fraud or identity theft, or catch small math errors before they become major ones. Invoices are less likely to get lost. It’s less likely that you’ll end up paying late fees. You will compensate employees before they suffer financial harm or harbor a grudge against you. You are less likely to find yourself faced with an unexpected expense. And, since one of your major expenses is paying estimated taxes to the IRS, you reduce your chances of penalties for failure to pay or late payment of those estimated taxes.
Embrace the good. With up-to-date and accurate expense records, you can make better decisions on a variety of issues, from hiring to new products to taking vacations. You may even discover money you didn’t think you had, meaning you can pay off debt or set aside funds for future business growth. Whether you plan to borrow for growth or to cover expenses for your off-season, well-kept expense records will make the process easier.
Related: Don’t File and Forget: Use Receipts to Get Business Spending Insights
Embrace these five strategies to go from “surviving” to “thriving”
Controlling expenses is especially important for a small business. Imagine a bakery that doesn’t know how much it spends on flour or a freelance web designer with more professional subscriptions than time to use them. Managing expenses is more challenging for a small business; they typically have a small staff, which means everyone is stressed. Distractions are greater and space, real and cyber, can be limited, making it easier to lose things.
These five expense management strategies will keep you on track and get you from struggling to overcoming:
1. Budget
The budget is essential for managing expenses. Budgeting sets limits on how your business should operate. By comparing (reconciling) your spending goals for important categories with what you actually spend, you stay on top of the financial health of your business. These will vary based on your business, but will include things like rent, supplies, employee expenses, and utilities. Compare your spending to budgeted amounts for a specific period (e.g. monthly or quarterly).
The easiest way to do this is to list your budget items on the left side of a notebook or spreadsheet page, then enter your actual expenses on the right. Add a third column that shows the difference between your budget and actual spending from cash receipts, credit card statements, and bank statements. Prioritize the most important categories. Those that are essential – like coffee and sugar for a bar – will need more attention than those that are simply nice to have, like a television for customers.
2. Identify cost centers
Expenses may be important because they are large (for example, rent) or because they are critical to doing your job (for example, an Internet bill for a programmer or web developer). Marketing may be important because while it builds customers, it’s easy to lose control if your strategy includes pay-per-click or pay-per-impression Internet advertising. Cost centers can indicate a spending problem when there is too large a deviation from usual spending, or they can indicate that your business is growing or starting to decline. By tracking your expenses and their return on investment (ROI), you can identify products or processes that aren’t paying off internally. If your marketing ROI is too low, you can choose to support the trend towards self-service shoppers and drive more sales through online experiences, using fewer sales reps.
3. Outsourcing
Administrative tasks that you pay someone to do might be better outsourced online. These could include payroll, data entry, accounting, web design, marketing, call centers and even human relations (HR). Or you can try managing them yourself with software as a service (SaaS) providers. Start with the largest expense, but you should consider anything that improves profitability.
4. Establish office procedures
Once you have determined your course of action, you need to make it a routine. If you’re a sole proprietor, write down what you need to do, then do it. It may also be helpful to pretend that you report to someone else (even if you went into business to be your own boss). Consider the “accountability partners” who keep you engaged. If you have employees, document your procedures. Include when they need to be completed: for example, Tuesday is payroll day and Thursday is inventory day. Include who does it and detail all the steps.
5. Make technology your friend
Since 2020, small businesses that have made greater use of technology have shown greater growth in sales, profits and employment, according to the U.S. Chamber of Commerce’s Technology Engagement Center. Keep the first four strategies in mind when adopting useful technologies.
Related: 10 Tax Law Changes You Need to Know About to Save Your Business Thousands of Dollars
Total mastery
You must accurately capture transactions for any expense management structure to work. Check what you do and review the above procedures if they don’t work or if they change. Whether it’s growth, loss of business or outright disaster, things Want edit. This will affect all of the above and require new budgets, cost center decisions, outsourcing needs, office procedures and technologies.
When you implement these five strategies for the first time, your persistence will be rewarded. Profitability will increase as you systematically reduce costs, especially those that don’t help generate revenue. The process can be slow and full of missteps, whether you make a bad outsourcing decision or take a little time to turn Wednesday into an accounting day, but with your eyes on your goals you’ll find yourself soon master of everything you manage.