An obvious goal of any company is to make sure revenue exceeds cost. This may sound simple, but in reality, keeping expenses on track may be one of the hardest things you have to do for your business.
First, though, what qualifies as an expense?
Investopdedia.com defines an expense as the economic costs that a business incurs through its operations to earn revenue; in order to maximize profits, businesses must attempt to reduce expenses without also cutting into revenues.
The next step is distinguishing the difference between operating costs and startup expenses.
A startup expense is any expense that was necessary to starting your business. Most likely, you only will recognize these expenses for one to five years after your business is up and running.
Operating costs are any ongoing costs you must make for your company to stay in business. Examples can include rent, utilities and payroll.
So how can you keep your operating expenses low to ensure you are not wasting your profits on unnecessary costs?
Here are some ways to cut back on expenses that will allow for you to carry on everyday operations without feeling the squeeze.
- Keep your payroll small. This is easy for startups to do, given your operations are smaller than other companies. Although employees may have more than one job on their plate, a small payroll helps keep company expenses at bay.
- Limit credit spending. Having the company credit card float around the office is convenient to have, but can lead to over-the-top and unnecessary spending. Employees are not disciplined and don’t learn how to budget if they think that the company credit card is readily available. Try to limit the credit card use and find ways to be resourceful. For example, office supplies can add up — conserve, rather waste paper. These little items will add up to big savings in the long run.
- Outsourcing is key. Learn which areas of your business can be outsourced, allowing you skip the hiring process for that position. For example, in startups, it is very common to see accounting services be taken care of out of house. Marketing is another area that is often outsourced, if it is addressed at all.
There are other ways to keep company expenses low. For every aspect of your business, there should be a budget. Without a budget, it is hard to note where your cash is going.
Expense reports also are a great way to measure your company’s expenses as a whole and also by department.
The most important thing to bear in mind is to be rational. Keep financial issues in perspective and don’t spend money on such luxuries as office decorating, trade show participation, or Fashion Week participation.
Until your business can afford to front the bill for more lavish expenses, it’s better not to fool yourself into thinking that you can afford it.
Nice article Chelsey – what about doing a follow up one on tools available for tracking expenses?
Thanks for the suggestion, Eron.