The Ultimate Guide to Managing Business Expenses
Managing expenses is critical to understanding and streamlining costs. Yet, many businesses poorly manage their business expenses, leading to overspending, missed tax deductions, and ultimately, financial loss.
This guide provides tips for categorizing, budgeting, tracing and ultimately reducing business expenses.
Categorizing Business Expenses
Start by breaking down your expenses into broad categories:
As the name implies, fixed expenses are charges that typically stay the same from month to month. Examples of fixed expenses include office rent, insurance premiums, and loan payments.
Variable expenses fluctuate from month to month. Examples of variable expenses include sales commissions, advertising expenses, travel, and salaries. These costs can vary widely depending on your business needs.
Periodic expenses are not charged regularly but do occur on an irregular basis. Examples of periodic expenses include legal fees, accounting services, and some taxes. These costs may come up quarterly or annually and can have a large impact on your budget.
Unplanned expenses include costs such as repairs, rebooking airfare for a stranded traveler, or other unexpected purchases that you didn’t plan for. It’s important to have a contingency fund set aside for unplanned expenses.
Budgeting for Business Expenses
A budget enables business owners and managers to plan their expenses in advance, track spending throughout the year, allocate resources efficiently, and identify potential areas for savings.
Benefits of Budgeting
Budgeting isn’t just about cutting costs. Budgeting enables business owners to plan for future costs and set aside money for unplanned expenses or investments.
Having a comprehensive budget also ensures you have:
- Improved cashflow – Ensure you have enough money to cover expenses (and surprises).
- Financial clarity– Plan ahead, allocate resources evenly, and identify areas where you can cut back.
- Enhanced efficiency – Creating a budget eats up a little time at the beginning, but then you can quickly make decisions with confidence.
Steps to Creating a Budget
Here are the steps to creating a budget:
1. Identifying Your Income
The first step in creating a budget is to determine your total income by adding up all your income sources. This can include annual sales, service charges, subscription income, royalties, and any additional sources of income.
2. Listing Your Expenses
Once you’re clear with your sources of revenue, the next step is to list down all of your monthly expenses. This may include rent, utilities, software subscriptions, headcount, insurance, travel, transportation, entertainment, and any other bills or expenses your business may have. This is often the most time-consuming step with the most surprises.
3. Categorizing Your Expenses
Once you have listed all of your expenses, categorize them into fixed expenses, variable expenses, periodic expenses, unplanned expenses, and so on.
4. Tracking Your Spending
Keep track of your spending every month. Tracking in a spreadsheet is tedious and can be replaced by automated expense tracking software to save valuable time for you and your team.
5. Reviewing and Adjusting Your Budget
Review and adjust your budget every quarter to reflect your expenses, income, or savings goals as necessary. By doing so, you can stay on track to meet your financial targets.
Reducing Business Expenses
After creating a comprehensive budget, you will likely want to reduce business expenses to save money and increase your profit margin. Here are some tips for reducing your business expenses:
Ways to reduce fixed expenses
- Negotiate better prices with suppliers – Companies can negotiate lower prices on products and services to get better deals.
- Reduce overhead – Look for ways to reduce overhead, such as cutting down on unnecessary office supplies or renegotiating rental agreements.
- Refinance or consolidate debt – Refinancing or consolidating high-interest debt can lower your monthly payments and provide more favorable terms that may help save money in the long term.
- Reduce energy consumption – If your business occupies an office space, take steps to reduce your energy consumption by turning off lights when not in use, using energy-efficient appliances, and setting your thermostat to a reasonable temperature.
Ways to reduce variable expenses
- Review your inventory management processes – Effective inventory management means you are aware of your inventory levels and order only what you need. This can help prevent overstocking, or worse, keeping large volumes of dead stock.
- Implement a remote work policy – Remote work can help reduce variable expenses such as rent, utilities, and office supplies. Consider implementing a remote work policy where applicable.
- Use cost-effective marketing – Marketing can be expensive, especially digital advertising and PR. But there are cost-effective options such as social media, email marketing, and content marketing. Focus on these channels to reduce your variable expenses.
- Consider outsourcing – Outsourcing certain tasks such as bookkeeping, IT support, or customer service can sometimes be more cost-effective than employing in-house staff.
Ways to reduce periodic expenses
- Shop for insurance – Insurance can be a significant expense for businesses. Shop around for insurance and compare rates to ensure you get the best deals possible.
- Cut down on employee transport – Vehicle maintenance can be yet another significant expense for businesses that provide transport to commuting employees. By implementing remote working days, you can avoid periodic vehicle maintenance charges.
- Conduct regular expense reviews – Regularly review your variable expenses to identify areas where you can cut costs.
Ways to reduce unplanned expenses
- Create an emergency fund – An emergency fund can help cover unexpected expenses such as equipment repairs. Set aside money each month to create a cushion for these types of expenses.
- Create a contingency plan – Develop a contingency plan that outlines how you will address unplanned expenses, such as cost-cutting measures or additional financing options.
- Monitor spending and review vendor contracts – Regularly monitor your spending and review vendor contracts to ensure you are getting the best terms possible.
Tracking Business Expenses
Tracking business expenses helps you cut unnecessary costs and improve profitability. It can also help you prepare for tax season and avoid any legal issues.
Key principles of effective expense management
Whether you are a small business owner or a large corporation, controlling your expenses can help maximize profits and ensure that your company operates within budget. Here are five key principles of effective expense management:
1. Encourage cost-consciousness
Encouraging cost-consciousness among your employees is crucial for effective expense management. Make sure your team is aware of the company’s budget and the importance of controlling costs. Encourage them to suggest ways to save money, such as using video conferencing instead of travel, or sharing office space with other businesses. You could also consider offering a rewards program that incentivizes employees to keep travel spend and related expenses under budget.
2. Invest in expense management tools
Manual expense tracking can be time-consuming and error-prone. Automating your expense tracking process makes it easier to catch mistakes, ensures that expenses are organized in one place, and provides data for future analysis.
Investing in expense management tools like accounting software or expense tracking apps can help you streamline your expenses and save time. These tools can help you automate expense tracking, categorize expenses, and generate reports to help you make informed financial decisions.
3. Prioritize spending
Not all expenses are created equal. Therefore, it’s important to prioritize spending so that resources are focused on the most critical areas of the business. For example, investing in marketing may be more important than renovating the office space. Prioritizing spending ensures the most value is received from the money spent.
4. Establish clear budgets
One of the most crucial principles of effective expense management is establishing clear budgets for different departments and projects. This will help to keep expenses under control and ensure that you are not overspending on any particular area of your business.
5. Regular review and analysis
Finally, it’s important to regularly review and analyze the organization’s budget and expenses to identify areas for improvement.
Common challenges and how to overcome them
So, you’ve put the key principles of expense management in place – but that doesn’t mean you won’t run into challenges. Here are some common issues and tips for overcoming them:
1. Lack of visibility
One of the biggest challenges in managing business expenses is a lack of visibility. It can be difficult to track and monitor expenses in real-time, especially if your business uses various payment methods. To overcome this challenge, consider using virtual cards or expense management software that provides visibility into all expenses in one place.
It can be difficult to ensure all expenses are compliant with your company’s policies and tax regulations. To overcome this, establish clear policies and guidelines for your employees to follow. Regularly audit expenses to identify any non-compliance issues and take appropriate action with help from your tax accountant if needed.
3. Fraudulent expenses
It can be difficult to spot fraudulent expenses, especially if employees are submitting expenses for small amounts. To overcome this challenge, leverage technology and implement straightforward expense management policies. With virtual cards, for example, your finance team and managers can limit the merchant category codes allowed to be charged to the card. Review the existing expense management practices to identify any suspicious activity.
4. Poor record-keeping
Poor record-keeping can lead to errors in expense reporting and compliance issues. To overcome this challenge, ensure all expenses are accurately recorded and stored in a central location. Use digital tools to automate record-keeping and reduce the risk of errors.
Best practices for expense management
Unless you set policies and guidelines for managing expenses, employees may not understand what is expected of them. Make sure to outline clear rules regarding who can spend money on what, when, and how much. Doing this will help to ensure that there are no surprises when it comes time to reconcile accounts and balance the budget.
1. Set limits
Set limits on expenses for each category to prevent overspending. For example, set a limit on how much money can be spent on travel or meals. This can help keep costs under control and prevent departments from going over budget.
2. Monitor expenses regularly
Regularly monitoring expenses can help you identify areas where you can cut costs or invest more money. Review expense reports regularly to keep track of where money is going and make necessary adjustments.
3. Keep receipts
Keeping receipts is crucial when it comes to business expenses. Make sure employees submit or capture itemized receipts for every expense. This can help with record-keeping and ensure accuracy in reporting.
In conclusion, managing business expenses can be a challenge, but with the right strategies and tools in place, you can easily overcome common issues. Set clear policies and guidelines, monitor expenses regularly, and use expense management software to help make the process easier.