Many business owners are surprised by how high their expenses are—or just how many different types of expenses there are in order to run their own company. To get more value from your small-business spend, it is critical that every owner implements a series of money management tips that include a business credit card. This is where to start:
1. Separate out fixed and variable expenses.
In your business, it is critical to separate the expenses that are fixed (you incur them no matter your level of revenue) and variable (those based on the amount of sales or a chosen discretionary activity). Common examples of fixed expenses are full-time employees, rent and utilities. Variable expenses are items like sales commissions, travel, freelancers and marketing.
Keeping more variable expenses and less fixed ones can help your company stay consistently profitable even during periods of weaker sales. Fixed expenses can put pressure on the bottom line when sales dip. But some fixed expenses can be turned into variable ones. For example, less critical employees can become freelancers. The marketing function can be outsourced to a separate vendor. Sales distributors can be utilized instead of company-employed direct representatives.
2. Determine the value of each expense.
This is the critical step if you are going to implement new money management tips and get more value out of every expense. Start by printing out the most recent profit and loss statement. Examine these line items:
Cost of goods or service: Ensure that this is made up of the cost of people and/ or products. Ask if the same level of quality in product or service can be delivered with less people, lower-paid people or a lower-cost product sourced by a different vendor. Remember if your gross margin is increases here, it adds profit to the net income bottom line.
General and administrative expenses: Set up four columns on a spreadsheet or manually on paper. From the profit and loss statement, list in the first column all the expense categories. In the second column, list the expense amount. Put in the third column an “F" by each that are a fixed expense and a “V" by the items that are a variable expense. In the fourth column, estimate the value that your company gets from each of these expenses or questions you have on their value or perhaps how to reduce the cost. This should be done in terms of numbers when possible. The columns where the financial benefit does not match the return on investment need to be closely examined so they can be reduced, better priced or eliminated.
Keeping more variable expenses and less fixed ones can help your company stay consistently profitable even during periods of weaker sales.
3. Use a business charge or credit card that can give you buying benefits.
Most companies implement business cards as one of the many money management tips they use to pay their expenses once a month. But using this form of payment can not only give you the convenience of paying one bill and providing a spending analysis all in one place, but could have other group buying benefits. For example, the amount of money your company spends every month can earn rewards towards travel. Some business charge or credit cards can also grant lounge access, acquire special status at hotels and earn credits for specific vendors.
All of these money management tips are designed to help you get more value out of every dollar you spend and ultimately help you earn a higher net profit. Just as importantly, your analysis of all your small-business spend by category is the first step to managing expenses better.
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