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    5 Keys to Managing Expenses in Your Small Business

    Posted by Sylvia Lagerquist, CPA

    5 Keys to Managing Expenses in Your Small Business

    Expenses are a unique challenge for small business owners. Tracking them can seem inordinately demanding, avoiding them can leave you with an unnecessarily high tax liability, and ignoring them can open you up to the risk of fraud. One way or the other, you need to take control of your small business expenses now.

    Here are five keys that you can use to improve your small business expense management today:

    1. Budget Accurately and Appropriately

    One of the root causes of out-of-control expenses in many small businesses is actually a weak budgeting process.

    Many business owners think that their expenses are not in-hand because they (or their staff) are regularly making unplanned purchases, but when they review these expenses, in most cases the ‘unplanned’ items are things that should have been planned and budgeted for, i.e. they were (and are) necessary to the operation of the business.

    You can’t run a retail store with no budget (or process) for replacing cash register receipt rolls, lightbulbs, restroom supplies and so forth. You need to properly plan for the ‘real-world’ expenses of your business, and that includes reasonable budgets for:

    • Office supplies
    • Maintenance supplies and other consummables
    • Marketing and advertising
    • Office equipment and furniture
    • Technology (hardware and software)
    • Support services (bookkeeping, IT help, etc.)

    So, before you jump to the conclusion that your spending is out-of-control, go back and review your expenses to determine how many of them should have been planned for. Then, create a budget accordingly.

    2. Comparison Shop for Products & Services

    Whether it’s for office supplies or professional support, you need to become conversant with the real-world cost of the products and services essential to running your business. The best way to educate yourself is to prepare a Request for Proposals (RFP), or contact 2-3 vendors directly, and ask them to provide you with a quote or estimate for a specified set of products or services.

    Make sure that what you describe to each vendor is precise, and ensure that you give them the opportunity to offer their recommendations. Collectively, these insights will help you create stronger and more accurate budgets, as well as reducing and maintaining your operating costs.

    3. Minimize the Use of Cash or Personal Reimbursements

    Small business owners tend to use every available resource at their disposal to make the business ‘go’. That’s okay…to a point. One area in which this approach can be inherently dangerous is in paying for things. Cash is easy to lose track of, and if you or your employees are making purchases for the business with personal checks or credit cards, it can create all kinds of problems including misclassification of purchases, inaccuracies in payment tracking and confusion during the reimbursement process.

    In addition, as the business owner you can run the risk of creating tax problems by intermingling personal and business expenses inaccurately. Instead, secure a business credit card and set up accounts with major vendors that you can monitor in real time.

    4. Use Software and Mobile Apps

    Hopefully in this day and age, it is a given that every small business needs to have professional accounting software. If you don’t have proper software in place yet, then make sure to read our article, Choosing the Best Accounting Software for Your Small Business to prepare for that major step.

    However, in addition to your core accounting system, you need to set up the right tools for expense management. Consider applications that have a full-featured mobile app so that you and your staff can record field transactions in real time, and capture images of all applicable receipts. If you or others travel for the business, you can use mobile apps to help track business mileage with great precision. Not only do these help you automate the expense management and reimbursement process, but they can also improve your readiness for tax filing as well.

    5. Don’t Create Expenses Just for Tax Savings

    Our final piece of advice is perhaps the hardest for many small business owners to abide by. The end of the year is approaching fast, you know you’re going to have a large tax bill, so you give into the temptation and run up a large number of business expenses in the last two months of the year.

    Of course if these investments and expenditures were planned for, budgeted for and are aligned with your business strategy, then by all means, proceed. However, in a great many cases, they are not…so business owners look for the easiest options with the highest price tags, particularly items like furniture or capital equipment that can be depreciated quickly.

    This ultimately becomes a trap, however, because these are precisely the kinds of expenses that may reduce cash flow and lock down working capital when you need it the most. Don’t risk discovering in the new tax year that you can’t afford two new hires you do need to make because you burned up your cash reserves buying office furniture that you don’t need.

    The solution, of course, is threefold. First, work with your CPA year-round to evaluate your financial and tax position so that you can minimize your tax burden strategically. Second, follow our earlier advice to create accurate and well-formulated budgets for investments that you will make throughout the year. And third, prepare a list of priority investments that can be made going forward in order to support your business strategy. Then, you can pull from that list if you need to go ahead and make purchases earlier than originally anticipated.

    By following these five keys, you will effectively prepare your business for a smooth and successful process of planning, budgeting, investing and managing expenses throughout each phase of your growth.

    Image Credit: Jeff Hitchock (Flickr @ Creative Commons)

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