How To Control Business Expenses Efficiently
In this post, we will see the importance of keeping an exhaustive cost control of our company, the types of expenses that exist, and when it is necessary to make decisions about them to improve the economic situation of our business.
In general, and more in times of crisis, the first step that companies take to improve their economic situation is the reduction of their expenses. But, to make these kinds of decisions, it is vitally important to carry out a good cost control in each of the areas that make up our organization. It is why, as already mentioned in previous posts, “L or not measured cannot control. What cannot be controlled cannot be improved.”
How to know the expenses of our business?
First of all, it is essential that our accounting information is updated and shows the reality of the business. The data must be reliable for decision making, and this is only possible through an updated accounting information system. For this, there are different ERP systems in the market, such as SAP Business One, which will allow us to automate the loading and classification of data.
Second, we must know the nature of all the expenses of our company. To do this, we must differentiate between variable and fixed expenses.
The variable costs are those directly linked to the volume of activity of our company. For example, raw material, direct labor, transportation, and distribution, etc.
The fixed expenses are those that occur regardless of the sales volume of the company, see rent, insurance, supplies, payroll, etc.
Once we have updated and classified expenses, we can implement an expense control system that will consist of the following steps:
All expenses will be reviewed to distinguish which are essential and which are superfluous, and we will proceed to dispense with the latter.
In turn, we will look for less expensive alternatives for those expenses that are susceptible to it. One of the strategies to reduce spending could be the negotiation with current suppliers or the search for new suppliers for the same type of service or product at a lower price.
We will shuffle the possibilities of “variabilizing” the expenses that is, converting part of the fixed expenses that we cannot eliminate into variable expenses in order to make our cost structure more flexible. For example: hire temporary staff, outsource services and operations, etc.
There will be expenses that occur periodically and others in a timely manner, and we must be able to distinguish them. For this, it will be necessary to keep track of the expenses in order to prioritize those that are not constant in order to anticipate them regardless of when the payment takes place.
Finally, it is convenient to provide a provision when there are expenses arising in the same or previous year, losses or debts whose amount is known or can be easily estimated. In this way, we will ensure that at the moment in which we have to face these expenses, we will have sufficient resources. An example of this would be obligations arising from ongoing litigation, compensation, or tax debts.
In addition, you can opt for financing options offered by a financial institution such as Affinity Beyond Capital (ABC). ABC is a brokerage firm that specializes in providing short-term capital to short and medium-sized businesses. Their credit terms are easy, flexible, and the sign-up processes are relatively easy. In fact, getting a loan from ABC is easier than going to the market to purchase groceries. Anyway, why do we recommend a loan from ABC? But it is your best shot at controlling your working capital, that is readily available cash to meet day to day expenses.
Why budget our business expenses?
After having our expenses classified and controlled, the next step will be to plan expenses. This implies the participation of all the areas of responsibility of the organization to ensure that each cost center is covered and a uniform criterion is used.
In our post five reasons why you should make an annual budget in your company, we explain what it is and why it is essential to prepare a budget. In the case at hand, the main benefit is that thanks to having budgeted all our expenses on a monthly basis, we will be able to detect deviations early and carry out the necessary actions to avoid a continuous increase in our expenses and manage the available resources efficiently.
As good managers, we must rethink each of the expenses of our company at the beginning of each year and analyze whether they are likely to be reduced, eliminated, or variability. With good planning and discipline, we can easily control our expenses and pave the way towards our annual goals.
Therefore, we must understand that carrying out an adequate control of expenses will be one of the keys that will help us control the main parameters of our company when establishing our Management Control.