Keeping track of expenses is important for small businesses. Recording and regularly reviewing your business expenses gives you a good idea of the revenue earned against the money spent. It helps you pinpoint unnecessary expenditures and know when it’s time to cut costs to maintain profitability. Ultimately, this helps small business owners plan for the future with more clarity and confidence.
Capital inflow and outflow are daily processes in any business. Large sums of money are spent as well as earned, and generating a profit is the ultimate goal. Profitability is measured with income and expenses, and it is the primary reason for examining your expenses on a regular basis.
Measuring Profitability
Income is money generated from the activities of the business. For example, manufacturing and selling machinery generates income. However, borrowing money does not create income; this is a transaction between the business and the lender to generate cash for operating the business or buying assets.
Expenses are the cost of resources consumed by the activities of the business. When you’re trying to calculate if you are profitable on a project or product, you need to look at all of the expenses associated with it. If you’re a staffing company, this includes the cost of your employees, their health benefits, the cost of the manager who oversees them, office space, insurance, and marketing. If you manufacture a physical product, your expenses are more complex. You need to look at everything from the costs of raw materials and machine use to electricity and overhead.
Measuring profitability is the most important measure of the success of the business, and examining your expenses is a critical part of the equation.
Follow Your Cash Flow
To be successful, you must be actively involved in the money management of your business even if you’ve hired an experienced professional to do so. Knowing the financial aspects of running a venture is as important as knowing about the product or service you’re selling.
This means having a fundamental understanding of basic accounting functions and tracking tools. Focus on tracking the movement of cash in and out of your business. Following your cash flow will help you determine if too many of your company’s assets are tied up in inventory, if you need to collect money that is owed to you, or if there isn’t enough inflow of cash to the business.
Summit Financial Resources sees cash flow as the lifeblood of any small business. When you have enough cash on hand, you can hire more, produce more, and pay less for supplies. It’s not unusual for companies to run into unexpected situations where they suddenly have too little cash on hand. This can happen no matter what the industry or how healthy the business. If your cash is falling short, we can get you more of it. In fact, for many small businesses, our core product – Invoice Factoring – is key to their ongoing cash flow strategy.
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Use Your Accounting Software
Make the maximum use of your accounting software. Programs like QuickBooks and Sage50 make it easy to track your expenses on a weekly and monthly basis by generating financial reports. You should personally review your transactions and revenues so you can forecast trends and develop monthly, quarterly, and annual budgets.
Maintain a Budget
One of the most important financial management exercises is creating and using a budget. This involves examining all of your expenses and estimating what they will be for the coming year.
Review your weekly expenses in detail and see how well your revenues stack up against them. Monitoring your expenses will allow you to instantly spot trends and problems. This will help you focus on the drivers behind each expense, making it easier for you to determine whether they are in alignment with your allocated budget. Your estimates will not always be on target, but if you understand why a line item is considerably over budget, you’ll know what to fix and how.
Cut Costs, Not Quality
Managing your small business effectively means being able to reduce costs and expenses without cutting into your profits or sacrificing the quality of your product or service. Keeping a close eye on your expenses will help you identify what you need and what can be cut to lower business costs.
While it’s tempting to cut large expenses first, not investing in key areas like marketing, training, insurance, and safety measures could seriously hamper your company’s growth. Make sure you allocate enough funds to the most critical areas of your business, and set aside contingency funds for emergencies.
A business that is not profitable cannot survive in the long run. Monitoring your expenses is essential to maintaining a healthy business that is highly profitable and positioned for growth.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.