Maintaining tight control over both fixed and variable expenses is an essential part of maximizing cash flow and profits in your business.
There are a variety of tactics entrepreneurs can employ to rein in expenses and prepare for unforeseen costs that crop up over the course of the year. BDC Client Partner John Brison offers several suggestions to better control expenses.
1. Make a plan
You need to evaluate where your business is now and where you want to take it in the future. A well thought-out road map is essential to properly forecast expenses and provide for contingencies.
“For instance, if you intend to pursue a new market next year, you have to build the related expenses into your forecast,” Brison says.
2. Track expenses diligently
You have to understand your historic costs before planning for the future. This requires gathering data in an effective and efficient way.
“Tracking your costs shouldn’t be an afterthought, it needs to be an integral part of your ongoing operations,” Brison says.
3. Benchmark against your industry
Establish metrics that are meaningful to your business and comparable to those used by other companies in your industry. “If you see you’re spending more in certain categories, then drill down, investigate why and take appropriate action to reduce those costs to industry norms.”
4. Manage variable costs
Look at your company’s past variable expenses and calculate what percentage of sales they represent. Historic percentages provide both a good indictor of potential future costs and a benchmark to use in keeping those costs in line with selling activity.
5. Get tough on fixed costs
People tend to become complacent about fixed costs because they are generally recurrent and often reflect long-standing relationships with suppliers. But you should periodically test the market to see if you can get a better deal from competing suppliers.
“It’s good practice to get two or three quotes regularly,” Brison says. “Whether it’s by putting out a request for proposal (RFP) or a less formal method, it’s important to send out the message that you are always watching your costs.”
6. Invest in technology
Explore new technologies that may help your business improve efficiency, increase productivity and reduce costs. For example, many companies are now using cloud computing systems as opposed to in-house hardware that can be relatively expensive to buy and maintain.
7. Offer incentives to staff
Make people accountable for costs and establish appropriate rewards for employees who find ways to reduce expenses. This helps to create a zero waste culture within your organization. It also helps motivate staff members charged with implementing expense-reduction initiatives to stay on task and be creative.
“I like to explain overall expense management in three Rs: Research, review and respond,” Brison says. “It basically boils down to careful planning (research), making tweaks and adjustments as they’re needed (review) and rolling up your sleeves to do the necessary and ongoing hard work to achieve the plan (respond).”
Culled from:BDC.CA/Articles