Balancing the books, building savings, and investing for the future are all essential for a strong business foundation.
The key to making space for investing is managing. It allows funds to be set aside without impacting the core operation of the company. But simply cutting spending to the bone is likely to be counterproductive, so here’s how to approach managing small business expenses most efficiently.
The two kinds of expenses
Business expenses are split into two main types: essential and discretionary. How to go about reducing a particular cost depends mainly on its category.
Essential expenses are the bills you pay to keep your business running, and which can’t be deferred or eliminated without severe consequences. This includes:
- Premises costs such as rent, insurance, utilities, security, and so on
- Tax payments
- Essential equipment leasing or purchase
- Staff costs such as payroll and benefits
- Professional fees such as accountancy, legal advice, and banking
- Debt servicing
Non-payment of essential expenses isn’t an option, but that doesn’t mean the costs can’t be rationalized. For example, equipment leases could be converted into ownership through low-cost finance, reducing the monthly payments. Banking and insurance services can be examined for potential savings, or expensive debt moved to a lower-cost line of credit, and so on.
Any other expenses which aren’t legally or practically essential for running your business come under the discretionary category. This includes:
- Non-essential subscription services
- Travel, dining, and entertainment
- Non-urgent upgrades to equipment or furnishings
- Staff bonuses and perks not written into contract
- All of these costs should be carefully monitored and streamlined where possible. Before authorizing any discretionary expenditure, ask yourself what the business case is. Does it add to the bottom line, even if only indirectly? If not, then it’s likely an expense that could be cut.
Investment and development expenses
Investment expenses can be in either of the two main categories. Usually, some level of investment in core products or services is essential to maintain standards and competitiveness. A business that doesn’t have forward momentum will inevitably start to go backwards as more proactive competitors push ahead.
However, many investments are expenses that can be deferred temporarily if trading conditions require, and are therefore classed as discretionary.
For example, investing in upgraded office furnishings and facilities may improve staff morale, and so provide an indirect boost to business. This effect should be taken into account, but in most cases, the investment isn’t immediately unavoidable and can be delayed until there’s plenty of scope in the cash flow to allow it.
It’s natural for small business owners to focus on generating growth and increasing revenue, but both sides of the profit equation are equally important. Get your expenses under control and the effect on your bottom line will be just as welcome as any rise in revenue.