As a small business owner, it’s crucial that you manage your expenses well. In fact, Fundera found that 20% of all small businesses fail within the first year, so it’s vital that you develop good money management habits right from the very beginning. Small businesses tend to have smaller profit margins, so it’s essential to keep careful control of your costs. Here are five easy tips on how to better manage your expenses so that you can maximise your margins.
1. Start Immediately
The majority of businesses incur costs before they officially launch. It’s important to keep a careful track of your expenses before you even open your doors, be they virtual or physical. Even the smallest costs can really add up over time! No business owner wants to pay more tax than strictly necessary, so set yourself in good stead by carefully recording your expenses right from day one.
2. Open a Separate Business Bank Account
Opening a separate business bank account makes it infinitely easier to keep track of your spending because it avoids the risk of confusing business and personal transactions. You cannot claim personal expenses as business costs, and such a mistake on your tax return could result in a significant penalty. Furthermore, having a separate business account ensures that you won’t overlook any transactions and end up paying more tax than you should.
3. Use Accounting Software
Online accounting software makes it easier to manage your spending. Many programs allow you to upload pictures of your receipts and invoices and then organise them accordingly. This will save you a lot of time and prevent you having to manage a mammoth backlog of records all at once.
Furthermore, accounting software will provide you with a clear picture of your spending and even allow you to understand which costs generate the most significant return on investment. This is actionable data that will allow you to cut costs where necessary and focus more on profit-generating activities.
4. Create a Clear Budget
Creating a realistic business budget that you can actually stick to is an important step in managing your expenditure. You will then be able to monitor your performance against this budget and adjust it when necessary.
In order to create a realistic business budget, you must first calculate your income, then determine your costs and work out your profit from these figures. This will tell you how much you can afford to spend and allow you to set a cap on your expenditure. Be sure to review and update your business budget regularly; an outdated budget is of no use to anyone.
5. Take the ‘Little and Often’ Approach
Let’s be honest: as a small business owner, bookkeeping is unlikely to be your favourite task. Treat it like a household chore and take the ‘little and often’ approach. Spend a little time each day or week to record your expenses and measure them against your business budget. This will give you an accurate idea of what you’re spending right now and allow you to fix any potential problems before they spiral out of control.
Conscientiousness is the key to prudent expense management as a small business owner. By being proactive about bookkeeping from the very beginning of your business, you will find it much easier to manage your spending. A clear understanding of where your money is going is crucial if you want to cut costs. Furthermore, by creating a realistic business budget, you effectively devise a roadmap for spending that will make it far easier to make smart decisions when it comes to expenses.
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Managing your expenses is tremendously important for ensuring that your small business stays profitable and flush with cash. It’s important to keep a very close eye on your expenses to ensure that you stay within budget and don’t go into the red. Here are seven top tips for managing your expenses as a small business owner
1. Understand Allowable Expenses
Allowable expenses are costs you can deduct from your tax return. It’s important that you understand what your allowable expenses are to ensure that you track them carefully. Examples of allowable expenses include rent, staffing costs, utilities, insurance, raw materials and tools.
2. Track Everything from the Beginning
You will probably incur costs before your business officially opens, so be sure to keep a clear record of these. You will be able to claim them back later and knock a significant amount off of your tax return. It’s also a good idea to open a separate business bank account so that you can easily keep a log of all your business transactions without confusing them with personal costs. There are also many accounting and expense tracking applications that are very helpful for this because they allow you to stay organised and see a detailed breakdown of your spending.
3. Set a Weekly Expenses Budget
You may have budgeted for your expenses over the year, but big numbers can often feel abstract. Breaking your budget down into weekly goals gives you a better idea of how much you can afford to spend and allows you to identify where changes need to be made. This will also help you to understand how you are performing against your budget and put policies in place to keep your finances under control.
4. Take a Little and Often Approach
If you only update your books once every few months, you might find yourself buried beneath a pile of paperwork. It’s better to take the little-and-often approach to updating your records and do it daily or weekly. If you need to, set aside a block of time each week to do so. It’s also a good idea to install your accounting software app on your phone so that you can access information on the go.
5. Create a Cash Reserve
As a business owner, you will find yourself facing unforeseen costs at one point or another and it’s important to be prepared. Out-of-the-blue expenses such as equipment replacements or repairs shouldn’t devastate your business or blow your budget. It’s a good idea to set some cash aside to cover unforeseen expenses so that you can protect your budget with a buffer and sleep easier at night.
6. Shop Around
One way to make managing expenses easier is to find cheaper alternatives. It’s often worth shopping around and trying to negotiate better deals with suppliers to ensure that you’re not overpaying for goods and utilities.
7. Encourage Remote Working
Allowing employees to work remotely has some serious benefits for business owners. Global Workplace Analytics found that 60% of employers identify cost savings as a major benefit of allowing employees to work from home. Expenses such as utility bills, cleaning services and even refilling the coffee jar are greatly reduced when employees work from home more often. Furthermore, research by Stanford University found that employees are 13% more productive when working from home, so employers get more out of their staff whilst saving money.
Every business owner must manage their expenses carefully. It’s important to understand which expenses are allowable and track them even before the business officially opens. Setting a weekly expenses budget and taking a little-and-often approach to bookkeeping also goes a long way towards better expense management. Finally, shopping around, creating a cash reserve and allowing employees to telecommute at least some of the time can also help to make your expenses feel more manageable.
Book a free consultation here, to discuss your needs and how we can help you manage your business finances, including expenses.