Ken Wentworth can almost predict the moment new clients will roll their eyes, grit their teeth and start uncomfortably moving in their chairs. It's always during the first meeting, and it's always when the topic of expense management comes up. Wentworth is owner of Mr. Biz Solutions, a CFO consultancy based in Columbus, Ohio, and his job is to help small businesses with the sometimes-murky waters of financial management.
Over his more-than 20-year career, he's seen everything from a sinking small business holding tight to spending thousands on ads in the phone book (“Their customers were most definitely not looking there," he says) to another fledgling company keeping multiple physical locations when one would have been sufficient (“We are talking about tens of thousands in wasted money," he adds). More often than not, once Wentworth explains the need to cut a specific expense, his client usually looks at him sheepishly, like a dog with their tail between their legs.
“When I say out loud what they need to cut and they realize what I'm talking about, they often say they feel like idiots because it seems so obvious," he says. “I always stop them and say, 'No, you are amazing at creating your business; its OK to ask for help with the financial side of things.'"
Confusion between a company's gross margin and its net profit margin are often at the base of expense issues. Gross margins can be calculated by taking a business's total sales revenue minus its cost of goods sold. Net profit margins are calculated when taking into consideration all operating expenses.
“Business owners often forget to include the cost of things like staff salaries, rent and marketing in their margin numbers," Wentworth says. “Many times I will work with a business where their gross margin might be 58 percent, but they aren't making money because their operating expenses are closer to 68 percent. It can be a rude awakening when we chat about expenses."
Worried you may fall into the camp of one of Wentworth's clients? Fear not. Here are a few ways to help ease issues with expense management.
1. Establish a scoring system.
To help his clients figure out which expenses are worth it and which can be tossed in the trash, Wentworth uses a scoring system. He looks at every line item and asks the question: Does this expense impact top line sales or revenue?
Then, he and his client give each expense a 1-3 rating. If the expense gets a 3 rating, it means it has a direct impact on sales or revenue. If it gets a 2 rating, it has an indirect impact. If it gets a 1 rating, it has zero impact.
He then goes through each expense a second time with his client and asks the question: Does this expense impact customer service?
The pair then goes through the same rating system again. “So each line item gets two scores," he says. “If, at the end of asking those two questions, a line item gets a 5 or a 6, we treat that expense as sacred. If it gets a 2, I tell my client they need to cut that expense in half at the very least."
2. Prepare for the worst.
Jon Broder thought he was ready for anything until fall 2016 when a hurricane came careening into the Florida coast, near the Fort Lauderdale offices of his company, VortexLegal, and he had to relocate his entire workforce on a moment's notice. The company of 20 employees, which manages thousands of remote attorneys to attend hearings across the country, was forced to hop into a van and hightail it to drier ground, fast. “We work online and have clients everywhere; we couldn't shut down operations because of what was going on in our physical location," he says.
Broder settled his crew in Atlanta, a drive that took 14 hours because of traffic congestion, rented a temporary apartment and set up shop at a local co-working space. The financial damages?
“It ended up costing us $20,000," he says. “We weren't anticipating those kind of expenses. We were able to pay payroll, but it was tighter than I wanted it to be."
Many times I will work with a business where their gross margin might be 58 percent, but they aren't making money because their operating expenses are closer to 68 percent. It can be a rude awakening when we chat about expenses.
—Ken Wentworth, owner, Mr. Biz Solutions
These days, with the help and advice from his accountant, Broder has a hefty disaster preparedness fund, mostly in cash. He also recommends doing rehearsals if business owners are located in the path of frequent disasters, like hurricanes.
“Cash is king, especially if ATMs shut down," he says. “You never know what you're going to need money for. We ended up needing to spend about $1,500 on a local internet service provider. Preparation is everything."
3. Reevaluate your spending, even when the cash is flowing.
Last year, Matt Ross and his business partner looked at their revenue numbers and nearly jumped for joy. Just a few years after founding their consumer product review business, RizKnows, they were turning revenues in the multiple-millions of dollars without a ton of overhead.
Wanting to make the Reno-based office as hip a place as possible for their 10 employees, Matt and his partner invested in a handful of fancy HD monitors for the design team and a snazzy espresso maker, to the tune of $500.
When their external account came knocking for their annual tax prep meeting, though, the weight of those business expenses hit them like a ton of bricks.
“She asked us why several line items had gone up by so much in the last few months," Ross remembers. “We realized we'd gotten a little cocky in wanting to aid in creating a startup vibe. I mean, we already had a coffee maker; we didn't need a fancy espresso maker on top of it.
“We could have used that money differently. Instead of buying monitors, we could have spent $2,000 on a digital marketing campaign to drive more traffic to the website."
These days, Ross and his management team ask themselves two questions when expensing anything: 1) Is this expense a necessity to the business? 2) Will this expense help in our productivity?
“Those questions, as well as having a third-party accountant, have made a huge difference," he says. “Now, at least we are having the conversation."
Photo: Getty Images