I know it is exciting when you first start your small business, or when things are going well, you just want to go out and buy new swanky stuff, upgrade and make larger purchases. You want to go out lease an office and buy new modern furniture, upgrade to the latest software, buy a latest mobile phone, lease a business car, fill your shelves with the cutest office stationery etc etc.
The formula for business profit is: Profit = Revenue – Expenses. You don’t have to be a genius to realise to be profitable in small business you need to spend less than you what you earn.
It’s important, for those new to small business and those who have been in small business a long time, that you do not waste money on things you simply do not need. One of the main reasons a main business fails is lack of cash flow and working capital. Reducing your business expenses and spending your money wisely to give your small business the best chance of staying around for the long-term.
Increase your chance of small business success by reducing your expenses
As a small business owner you need to very wise with your money, however that doesn’t necessarily mean always buying the cheapest. There are other factors that will come into your purchasing decisions such as quality, reliability and service. Your business priorities will help you weigh up the importance of these factors.
You need know exactly where and what you are spending your money on in your business (it is common to overlook your smaller expenses but they do add up quickly) and then identify any areas where you can reduce your costs and therefore increase your overall small business profit.
How to reduce expenses in your small business:
Step 1: Make a list of all your expenses and the dollar amount
Include your one-off expenses, regular fixed expenses and your variable costs, such as:
- Registrations, licences and permits
- Fit-out of premises
- Utility fees (phone, electricity, gas)
- Purchase of stock
- Raw materials and parts
- Tools and equipment
- Website (design, hosting fees, domain name registration)
- Internet access
- Advertising and marketing
- Printing and stationery
Step 2: Review your expenses
Identify where you can reduce some of your small business expenses, such as:
- Lease computers and office equipment instead of purchasing
- Work from home instead of renting office space
- Use the free or low cost version of software rather than ‘pro’ version
- Outsource rather than hire permanent staff
- Do it yourself (DIY) marketing and PR
Here are some more expense reduction tips:
- Track your expenses. If you don’t know what you are spending your money on you won’t know where you can cut back. Also, when you track what you are spending you automatically become more mindful about what you are spending money on.
- Do your research before making a purchasing decision e.g. confirm your exact business requirements to ensure it meets your needs, look through customer reviews, take up any offers for a trail period.
- Manage your inventory closely. The more stock you have on hand the more working capital will be tied up in it. Use stock control to help make sure your working capital is not being tied up unnecessarily.
Review your small business finances regularly. You should have a clear picture of your small business finances at all times, you need to know what is coming in and what is going out and to ensure your expenses are not more than your revenue.