This article originally appeared on Inc.com as part of BusinessBlocks CEO Justin Kulla's weekly Inc. Magazine column. To see the original post, click here.
Imagine a kid after a long Halloween night of Trick-Or-Treating. They've collected a huge loot of candy and when they get home they have to figure out how and when to eat it. Do they eat it all at once, or save it over a long time? Perhaps they only eat it on the weekends. It's a big decision!
It's a competition about whether kids like candy more than business owners like cash in the bank but certainly paying bills is a lot less fun than eating candy. The point is that small business owners need to figure out how to allocate their capital to pay expenses. Small business owners must consistently monitor expenses so they can pay salaries, buy inventory, cover rent, etc. In fact, of all of the things business owners need to do, not running out of money is the #1 priority.
It's important to focus on sales and growth, but here's what the best managed companies but if there's no money, it'll be impossible to achieve. Here's what the best managed companies with expenses:
Stay on top of it
Set up a regular review procedure and even if you, as the owner, are not personally handling the details, it is crucial that you stay completely updated. Some people don't like the numbers and are glad to outsource it to someone else. But you won't know how to make business decisions if you don't understand your performance, cash position, payables, etc.
Most small businesses, especially brand-new ones, must keep "lean and mean" and managing the expenses is an integral part of that business mind-set. Don't ignore "small" expenses that can add up and chip away at your bottom line. Make a schedule of the costs that are essential to your business. It is essential to utilize an accounting software program that will be easy to use and keep current. Don't wait until the end of the month or quarterly- or even worse, until tax time to review and adjust expenses areas. Definitely review these expense areas with a financial professional such as your accountant.
Personnel expense affects almost all businesses
Even if you are a solo operator, review your salary expense and be realistic. Certainly at the beginning, keep personnel expenses with all their associated costs as low as possible. If, as owner, you are able to perform a number of roles yourself, you will be able to able to better gauge personnel requirements at a later date. Remember, salary is only one cost of personnel and the additional costs of benefits and taxes can be a burden to a young business. So hiring part timers or contractors at first can help offset some of the cost.
Be ruthless with overhead expenses
If you are operating in a home office space, scrutinize your various overhead including utilities, telephone and insurance. Investigate new technologies for phone and utilities that might be beneficial in keeping costs down. Often businesses feel like having a fancy office makes them feel legit but but a small business owner may be able to avoid expensive office space by utilizing meeting rooms in their local library (frequently free) or low-cost office space such as "We-Works". Shared office space also reduces the cost of office equipment such as fax machines, copiers and furniture. Fixed costs usually don't drive more business so it's best to operate an thinly as possible.
If you are starting a small business and must carry inventory then it is imperative to set up an inventory system. Excess inventory will be a drag on any small business and likewise sparse inventory may impede sales. Inventory is really just cash sitting on a shelf so you don't want it sitting too long. Be prepared to adjust the inventory on a very regular basis, if possible, your cash flow may depend upon it. Make sure that you have a tracking system that you can easily review- "missing" inventory is not an expense you want to encounter. Factor in the shipping expenses for your product. There are many competing freight services and it pays to compare several and re-evaluate often. These services normally raise prices yearly and may add fuel surcharges at high peak shipping times. You will also want to make sure you have good payment terms and that you collect your receivables quickly so working capital doesn't become an overwhelming issue.
Low cost marketing is better than high cost marketing.
Once you spend money on advertising, that cash is gone forever whether you get customers or not. The best marketing is word of mouth - your customers loving your product so much that they tell their friends. But you can also utilize other inexpensive resources such as social media including your local town blogs to market your business. Partnerships are another inexpensive way to find customers because you can pool resources and leverage complementary customer lists to reach new leads.
Managing your expenses will directly impact the profitability of your small business. Keeping a firm grip on all costs will benefit you as you expand and grow.