Why You Should Control Your Expenses
Before you can reduce your expenses, you need to know how much you are spending and on what.
Unless you are a non-profit, you are in business to make money. That means making a profit. Since profit is what remains from your receipts (revenue) after you deduct all of your expenses, it makes sense to look for ways to save some of your hard-earned dollars by controlling how much you spend.
However, controlling your expenses is not about arbitrarily slashing them from full-throttle to a trickle or even nothing. Instead, it is about aligning your overall cost structure with your profit goals, growth expectations, and market trends. And that requires some methodical finesse.
You Can't Fix What You Can't See
Before you can decide to reduce any of your expenses, you need to know how much you are spending and on what. For that, you have to categorize your expenses and track them from month to month.
Reviewing the level and the trend of each expense category will undoubtedly raise questions, such as "Why do we spend that much?" or "What was that for?" These are great questions, and it will usually take some digging to find the answer — although some answers will be obvious.
Without clarity about your spending, you cannot find these answers and control your expenses because you can't fix what you can't see.
▶ 5 Reasons Why Knowing Your Profit Is Crucial for Your Company's Success
Bookkeeping — Probably the Last Thing on Your Mind
To establish expense transparency, you have to categorize all of your expenses.
That's what bookkeepers do.
Bookkeepers go through your receipts, understand the business reason for each expense, and add its amount to a category best describing its nature. It can be a tedious task only bookkeepers love. That's why it probably is the last thing on your mind. However, the resulting reports are invaluable for the success of your business. You cannot run a company well without expense transparency.
Unless you love bookkeeping and want to spend your free time doing it, I recommend subscribing to a service that will do it for you. Many bookkeeping services use QuickBooks to record their clients' expenses. Whether QuickBooks is the best solution in your particular case depends on the size of your company, the number of receipts, and if QuickBooks seamlessly integrates with your back-office billing software.
Not All Expenses Are Equal
Goods that you purchase to resell for a profit differ from your overhead expenses. How?
Purchases for resale are actually welcome because you would have nothing to sell without them. However, if the amount you pay for these goods (cost) exceeds the amount you charge your customers (receipts), you would lose money every time you sell such items. You control these variable costs by tracking their percentage value in relation to your receipts (revenue). As long as the percentage stays the same or decreases, your business is doing well. However, if the percentage increases, you have a cost problem that you should investigate further.
Overhead expenses are a different matter. They typically stay constant and do not fluctuate with your revenue, at least not short-term. Hence their name fixed costs. Examples of overhead expenses are rent, telephone, internet, insurance, marketing, office supplies, and salaries and wages for your employees. To control these expenses, you track their trend and look for outliers, such as sudden spikes or persistently higher expenses compared to their twelve-month average.
5 Reasons Why You Should Control Your Expenses
Controlling your expenses requires some time and effort from you. Is it worth your time? Here are five reasons why expense control is essential for your business's success.
Maximize your pay. Since you pay yourself out of your company's profit, you could increase your pay if your expenses stayed low or grew at a lower rate than your receipts (revenue).
Increase the long-term value of your company. Keeping your expenses low could increase your profit and lead to a potentially higher valuation. It could also increase the premium (multiple) a prospective buyer would be willing to pay for a well-managed company versus one that does not control its expenses.
▶ How Much Is Your Business Worth?
▶ How to Prepare Your Business for SaleSelf-fund your growth. Lower expenses and higher profits could give you the freedom to self-fund your growth and not rely on loans from banks or equity injections from investors. Becoming self-funding is a significant step in any growth story. It makes running a business so much easier and faster. Gone are the time-consuming presentations to loan officers or investors and the awful waiting for their approvals when you are not relying on somebody else's money to fund your operations.
Attract and retain talented employees. Working for a well-managed company whose leadership invests wisely and rationally can be very attractive for current and future employees because they find their jobs more secure, knowing that such a company will be around for a long time.
Avoid business-destabilizing surprises. In business, when the livelihoods of your employees depend on how well you run your company, you want to avoid surprises that could destabilize your company and your employees' lives. Nick Murray, the author of many investing books, once famously wrote, "Surprise is the mother of panic." Unknown project cost overruns, an inflated cost structure, or excessive marketing spending could be sources of such panic-inducing surprises. Having transparency and control over your expenses can help avoid these surprises and put your company on a more predictable footing.
Managing a company requires knowledge, skill, and a great deal of discipline. Knowing that you need clarity about how much you are spending, what you are spending your money on, and whether your spending is aligned with your goals is a crucial step, but it is only the first step.
You must also have the discipline to review these reports monthly, question any deviation, and reliably act upon any conclusions you can draw.
It takes some money, time, and effort, but the benefits of expense control to your company can be immense.
