“You have to spend money to make money”, that’s undeniable. Before a business can gain profit, it must first invest in designing your office space, equipment, etc. Unless you’re a fully remote business otherwise, you also have to spend money to rent an office and hire employees. There are budgets for marketing and sales campaigns too.
Expenses are a necessary part of any business. But if you don’t control your expenses, chances are you’re likely to run out of funds. Worst case scenario, your company is deep in debt. That’s why it’s always important to have some plans in place to control your expenses.
Do you know what exactly business expenses are and how to control them? If you have to think about it for more than a minute, it seems like you don’t really have a good grasp on it. No worries. We’re here to give you insight into business expenses and tips to control expenses better.
What are business expenses?
Business expenses are costs required to run a business. It could be anything from the money you pay to rent an office to the funds for your employees’ training courses. Knowing types of expenses allows you to classify your expenses into the right group and manage them better.
Typically, these expenses are categorized into three groups: fixed, variable, and periodic expenses. Fixed expenses are costs that remain constant for a period of time, such as rental, employee salaries, or interest charges. Variable expenses, on the other hand, are costs that fluctuate over a period depending on the situation. Examples of variable expenses are raw material and direct labor costs. Periodic expenses incur less frequently than fixed or variable expenses. They’re payments for some special occasions such as education fees or travel expenses.
5 tips to control your expenses better
1. Make plans and stick to the budget
Doing business is like a running marathon, not sprinting. Aim for long-term progress, and don’t expect sudden good luck to carry you through. You need to understand your company’s mission and vision, evaluate where your business is now and where you want to take it in the future.
A thought-out road map is essential to forecast expenses and allows you to stay within budget. For example, if you want to expand your business to other countries in the next year, you’ll need a plan with clear goals and budgeted expenses.
2. Manage fixed expenses
Fixed expenses are costs that remain constant throughout a particular period. The reason why these expenses stay unchanged is that they are not directly associated with manufacturing or the business’s performance. As a result, fixed expenses are considered to be indirect costs.
To determine the fixed costs, think of the expenses you have to pay whether or not your company operates. For example, due to the outbreak of the Covid-19, many companies are being forced to shut down their operation temporarily. Though there are no operating activities, businesses still have to pay for fixed costs such as rent and interest charges. It’s important for business owners to understand the incurred expenses to manage and control them effectively.
Fixed costs are more controllable than variable costs. As a result, managing those expenses is less stressful and you can be more flexible if anything happens. Because fixed costs such as rent are established by contract agreements, if the landlord wants to charge higher rents in the future, they will have to notify you in advance. You’ll be aware of this change quite some time before it happens, thus coming up with different plans to deal with it.
3. Manage variable expenses
Variable expenses are costs that fluctuate from month to month. The payments you make in a given month could be different from your earlier bills or ones you’ll make in the future. Managing variable costs is no easy game for business owners. Therefore they have to understand the dynamics of these costs to stay competitive.
Variable expenses are costs that are associated directly with business activities. These costs are also known as manufacturing costs. They include raw materials, inventory, and direct labor costs.
Manufacturing costs rise either when the production goes up or costs of material rise. If manufacturing expenses and production volume go hand in hand and increase simultaneously, the business is more likely to witness a profit. On the other hand, if manufacturing expenses climb as a result of surged material costs, they are sure to hurt the business’s profitability.
To control variable expenses better, make sure you have at least three to five vendors for a particular material. It’s a poor bet to rely only on one supplier. Imagine if your sole supplier goes out of business suddenly, and you have no other suppliers to turn to; that’s horrible.
Also, once you have several suppliers, review them regularly. It’s standard practice to make an annual or semi-annual review of all your key vendors. It allows you to track which vendors are doing more business with you or who offer you the best price.
4. Manage periodic expenses
As its name suggests, this type of expense doesn’t occur monthly or annually like fixed or variable expenses. You’ll be surprised to know that these expenses are not associated with operating activities or manufacturing activities. However, there are some occasions that you’ll need these expenses, so you have to be aware of this and make a budget for them.
Periodic expenses include education expenses, networking expenses, travel expenses, etc. Is it necessary for your marketing team to update their knowledge and technical skills? Absolutely! A collection of skillful marketers will develop and execute strategies more effectively, which maximizes profits for the company. It sounds like a good idea to invest in a training course for your team. Or do you want to expand your contacts to gain more opportunities for your business? Then you have to go to a conference or a seminar and network. It’s the company’s responsibility to pay for such expenses like this.
5. Track expenses
Tracking expenses allows you to control them better. When an expense occurs, bookkeepers keep the receipt and record it into the account book. By doing so, bookkeepers can calculate how much a business spends in a month and create a report on spending habits.
A business generates hundreds of documents per month including receipts, invoices, proposals, etc. It’s a labor-intensive task to categorize and record those documents manually.
Gone are the days when bookkeepers had to do everything manually. In this technological era, bookkeepers use software to manage their work more efficiently and cut away many tedious tasks. Shoeboxed is a cloud-based software that helps businesses turn their massive paper receipts into digital data. You can get your receipts scanned, stored, and organized by your mobile app. It’s simple to install and easy to use. Start using Shoeboxed today!
The bottom line
Expenses are a necessary part of any business. They can make or break your business’s profitability. That’s why expense control is so important to every business. For those who’re looking for tips to manage their expenses better, following the advice you read in this article will be just what you need.