Every business owner knows that an understanding of data and key metrics is important in any business in order for the entrepreneur to make data-driven decisions, which are key to building the company and raising money.
While the metrics that are most important for a business depends on the type of operation it carries, (i.e. business model, goals, stage, and so on) there is one particular paradigm that is useful for all types of business: clear expense tracking.
Significance of Clear Expense Tracking
Increasing the business bottom line is not only achieved by garnering huge sales; controlling expenses and minimising costs are also sound ways of maximising organisational profit. By tracking and limiting expenditures, an enterprise gets to enjoy a bigger share of its income, possibly spending more for investments or for improved promotional and operational efforts.
Clear expense tracking goes hand-in-hand with tax planning. Both of these are only possible by categorising expenses properly. Not only will it help entrepreneurs view a clearer picture of business performance, it can also lead to bigger profits through expense reductions and tax deductions.
Taking into consideration the importance of limiting expenses, here are ways to monitor your company’s expenditures effectively:
- Review your historical expenses and current breakdowns
The first step is reviewing past transactions and expenses and breaking them down into categories. In doing so, company owners can see all the areas that often necessitate funding, which in turn, can be addressed by making certain business processes more cost effective. Examples would be shortening training programmes and consolidating the functions of similar job descriptions and departments.
A categorised approach not only allows a company to track down expenses, it can monitor its cash flow, as it makes the necessary adjustments whenever necessary. It also shortens the duration of operational processes, giving the firm more time to focus on other things. As the old adage goes, time is gold in business.
- Get rid of expense categories not used frequently
After recording the expenses over the past few accounting periods and comparing them with the others, the business owner will be able to identify items that are not used frequently. If the company, for instance, regularly allots a budget for office supplies and learns from the historical accounts that only a margin of these are actually incurred, the business owner then will be able to purchase sufficient amounts instead of overshooting the budget.
Remember, office supplies may seem cheap, but if they are procured by bulk and in periodic intervals, the rarely used items can add up to your expenses. What more for pricier things or activities?
- Make sure your categories are not too general
Class reunion expenses? Haircut and grooming? There are expenditures that your business may not really need. Identify them and get rid of them if they don’t have a lot of quantifiable benefits. Business expenses, in general terms, can be categorised into either fixed or variable expenses. Fixed expenses are those incurred whether or not the company makes a sale such as rent, monthly salaries, depreciation expense and the like. Variable expenses, on the other hand, are those incurred with every single unit purchased by the customer.
As to the use, expenses are further classified into operational and administrative expenses and marketing and selling expenses. Operational and administrative expenses, or OPEX, are those incurred in normal business operations such as wages, utilities and the like. Marketing and selling expenses are those incurred either in manufacturing or the selling of products such as sales commissions.
By identifying each item of expense into these categories, the business owner is able to identify the cash-outs are deemed unnecessary or with little use, to be stricken off the expense sheet and company operations.
- Find a good tool accounting software that forces good habits and get automated
Using small business accounting software forces you to keep up with data entry and keep tuned to the financial pulse of your business. An accounting program can help increase the accuracy of records by reducing and eliminating human errors in the calculations and data entries. It will also force the business owner to categorise every expense item. It also increases in the speed in the calculations of costs. Quite frankly, if you can optimize your business through technology, do so since its financial and operational benefits are long term. It’s like making one big purchase that neutralizes some of your other expenditures in the future.
For example, if the accounting software records every single transaction, sales tax will be calculated automatically. In fact, the program can calculate the total tax due right away, eliminating or at least minimising the need to hire tax experts. That way, the business can regularly update and pay taxes on time, avoiding penalties, sanctions and further expenses. It also creates reports more quickly, with predetermined summary items and categories. This will lessen manual work and allow employees to devote their time to other important tasks.
- Keep track of loan payments
Cash flow management involves forecasting cash inflows and outflows. It’s crucial to separate operational expenses from capital expenses. This is because capital expenses – such as monthly or periodic loan payments – are fixed payments that must be covered by a business’ cash-on-hand regularly.
Remember that cash inflows and outflows do not always match; careful planning is needed in order to make sure that the business has enough money to compensate for the fluctuations in the cash flows, and at the same time ensure a sufficient reserve to cover both operational expenses and fixed payments.
By doing so, the business is able to pay its obligations on time, maintain a good credit history and score, enabling them to take advantage of good business loan opportunities for its future needs.
By following the tips above, tracking how the business performs becomes easier. Increasing the bottom line becomes more possible when not-too-relevant expenses are removed, costs are reduced, and outflows are planned carefully. The business owner is able to make more sound business decisions because now he knows where the money is actually going and he can plan just how he wants to spend it. Sometimes all that a fledgling business needs is to cut down on certain expenditures to realize how much it is really earning, and that makes a world of difference.
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