Naturally, you’ll want to stay on top of your business finances as much as you can. There are a couple of key terms to familiarize yourself with here. To begin, everyone will be thinking about the profit margin. As a brief overview, this is the amount of money you’re making when you consider your income and expenses. A negative profit margin means you’re not actually making any money at all; your costs outweigh your income. So, the overall aim of a business is to gain a positive profit margin and make it as wide as possible.
The second term to consider is your cash flow. Effectively, this talks about the money coming and going on a regular basis. A good cash flow means you constantly have enough money coming in to cover what’s going out. It can feel similar to a profit margin, but it is different. You see, it’s entirely possible to have a negative cash flow at points in the year, yet still end the year with a positive profit margin.
Why do these terms matter? Because they help you understand the financial health of your business. They also place a lot of emphasis on your expenses. If you have too many outgoing expenses it will be challenging to maintain a positive cash flow and make a profit. Consequently, it’s crucial to understand where most of your money is going. When you do this, you can make changes to reduce your expenses and improve both cash flow and profit margin!
On that note, what are the biggest expenses present in your business? Generally, the following things will be your major concerns:
According to recent statistics, labor costs can account for around 70% of a business’s total expenses. Essentially, we’re talking about all of the costs associated with your employees. This will include their wages, benefits, employee taxes, etc.
Understandably, you rely on your employees to keep your business running. If anything, many businesses struggle because they need more employees to help! So, trying to reduce what you spend on labor costs can seem almost impossible.
In truth, there’s not a lot you can do as you should pay your staff a fair wage and give them good benefits. This will translate to more productive and loyal employees – if you cut their wages and provide hardly any benefits it won’t help at all. It will just create an environment where nobody wants to work for your business, so you’re constantly trying to hire new employees – which is expensive in itself!
The only thing you can do is consider alternatives to full-time employees. Is it more cost-effective to pay for a marketing agency than it is to hire an in-house team? The idea of outsourcing is likely your best bet to reduce labor costs without damaging the overall productivity or performance of your business.
Rent or mortgage payments
Do you work in an office, warehouse, retail store, restaurant, or any other commercial building? Basically, if you work somewhere that isn’t your home and do not have a mobile job, you’ll need to deal with certain expenses.
Primarily, rent will be the most significant thing to worry about. Most businesses will rent commercial spaces, so you have a constant stream of money leaving your company every month. The good news is that you may be able to put your rental costs down as a tax-deductible expense. In the grand scheme of things, this can help your profit margins at the end of the year. Unfortunately, rent will still have an impact on your cash flow, which could make it harder to pay other bills, potentially plunging your business into debt.
Likewise, if you buy your place of work, you still have mortgage payments to think about. Whether or not these are tax-deductible remains to be seen, but you’ll also end up with similar cash flow problems as this can be a big monthly expense.
Saving money on these payments could be as simple as working from home instead of working in an office. So many office-based jobs can be done remotely from home, so consider if this is possible as it will save an absolute fortune. Another possibility is to downsize to a smaller office – or an office in a less favorable location. It’s not ideal, but you could easily have an office that does the job but costs way less to rent every month.
Equipment, machinery & vehicles
Next, you have the cost of all your equipment, machinery, and vehicles. Effectively, we’re looking at anything you need to pay for to help you conduct your business. Now, some businesses will have far fewer expenses than others in this category. For example, an office is likely only going to have the one-time expense of purchasing computers and typical office equipment. However, a shipping company will have the cost of warehouse equipment and the cost of an entire fleet of vehicles.
It can be incredibly difficult to reduce your costs here, though there are some ideas depending on what you’re paying for. There’s a really good article called Commercial Fleet 101: What Business Owners Need To Know that goes into detail on how you can save money on a fleet of commercial vehicles. One particular idea includes using fuel cards to cut down on fuel expenses. Also, consider what type of vehicles are needed for your fleet – you can save money by using smaller vehicles instead of large trucks, for example.
Moving away from vehicles and focusing on equipment/machinery, it’s possible to save cash by getting second-hand equipment if it’s still in a good condition. Alternatively, renting equipment only when you need it is another smart idea. This is beneficial for construction companies who may not need specialist equipment on every job, so buying it would be a waste of money. Instead, you rent it when you need it, cutting down your overheads and improving cash flow.
A marketing plan
Every business will need to invest fairly heavily in marketing. A good marketing plan will help your company thrive by drawing more attention to it. Generally, it’s believed that most companies spend between 6-14% of their total revenue on marketing campaigns. That’s an absurd amount of money, but it’s needed to help you stand out.
Without a good marketing plan, your business will be left in the dust. Nobody will spot you from your rivals, so you lose more money each month as you’ve got your other expenses yet can’t generate sales. This is why some businesses end up increasing their marketing budget when they’re struggling to see a positive profit margin. It seems counterproductive, but investing heavily in this department can see better returns.
The trick is to figure out what works for your business and what doesn’t. This is easily done with a marketing audit. Simply analyze your current marketing expenses and see what the results throw up. You’ll quickly discover where you can withdraw money and where you can pump more in. The goal is to generate a good ROI, rather than necessarily trying to save money on a marketing plan.
General bills & fees
Clearly, you’ll also face a lot of general bills and fees when running your business. Stuff like energy bills and internet service charges are the first things that spring to mind. But, you could have a host of other bills or fees piling up as well. For example, if you do outsource or work with freelancers, they’ve got fees you have to pay. If you have a credit card, you may have a credit card bill to pay – likewise, any loans will have fees attached that you need to repay.
These expenses are annoying, but you can cut back on them pretty easily. Constantly compared and switch utility providers ensuring you’re always on the best deal and save loads of money. For things like insurance, you can lower your premium by following specific rules. As an example, if you make your business a safer place, the cost of worker’s compensation will decrease.
If there’s one area of your business that can be targeted as a place to save money, it would be this one.
Lastly, you can experience business expenses in the form of losses. For instance, you are sued by an employee or a customer because of an injury. This will mean your business has to spend money paying compensation to that individual. You can also throw in losses related to natural disasters that can cause damage to your property and require expensive fixes.
Yes, mitigating these losses can be as easy as getting the right insurance coverage, but it’s also more about being a responsible business owner.
At the end of the day, you must be aware of the biggest expenses present in your business. The majority of companies will see labor as the largest expense. Then, it will likely be your office costs or equipment/vehicles/machinery. Find out where most of your money is going, and then take steps to reduce your overheads to improve cash flow and widen profit margins.