Hi Guys, welcome to this week’s Finance Friday post. Today we have some interesting stuff to talk about, expenses. Expenses are a critical part of running your business. How does that saying go? “In order to make money, you have to spend money.” and it is true.
Circle of Life:
When you think about your finances, in theory, you can picture a continuous cycle. First, you spend money on investments that will be used to run your business. Once you have spent the money, you will implement the investments, and you should make sales which will bring in money. The money you make you will reinvest into your company by spending more money on inventory, marketing, or other necessary expenses, and so the circle continues.
Tell Me Why:
As a business owner, you should understand what expenses you have and why you have them. Some expenses are considered overhead costs. Overhead costs are the costs of running your business, these costs may not directly produce revenue, but are required to run your business. Some examples of overhead costs would be; rent, insurances, electric bill or phone bill. In addition to overhead costs, you have expenses that are required actually to make revenue. Some examples of these costs would be your inventory, sales commissions or supplies used to complete your services.
Knock Knock… Who's there? Opportunity
I love expenses because within the expenses great opportunities await. If you understand your expenses, you will be able to find opportunities to lower the costs. Periodically you should take some time to review all costs that are hitting your business. It is a good idea to track the various costs so you can easily see changes month to month. If you see costs are going up over time, take the time to dig into why the cost is changing. Ask yourself if the increase in cost is related to an increase in revenue.
It is important to understand your cost and what is driving it. If you are finding you have a high cost that is not improving your revenue, you may want to look at these areas to potentially lower your cost. If you can lower your cost and not impact your revenue, you will have increased your profit.
At the same time, you should be careful when lowering costs that directly impacts revenue. Many companies will go to great lengths to lower costs, but lowering costs without a strategy behind it could impact your business.
Let’s pretend that you have reviewed your expenses and decided to cut back on employees. You lay off two employees. One of these employees performs a service for your clients and is the only person who can perform this work. Now you get a call from your client who needs this type of service, with the employee gone you have to figure out how to service this client. Do you send someone who is not an expert, do you hire a contractor to do the work, do you tell your client you can no longer help them?
In this example, you may have saved on the cost of having an employee, but you may have just lost a client. Word of mouth is one of the best marketing tools we have. If your clients become unhappy with your services, then you may have an even bigger hit to your revenue down the road.
Remember cost is not inherently a bad thing. We need to invest in our businesses to make money. Take the time to understand your costs and what is driving them. Review any costs that your employees are submitting in expense reports. Taking the time to understand your costs positions you to make improvements to your profit.
At Finergy we can help you dive into the cost analysis and look for ways to decrease your expenses. Remember with all other elements equal, a decrease in expenses will increase your profit.
Thank you for stopping by this week. Next week we are going to look at tracking your expenses and your accounts payable.
See You Next Week!
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