Business owners constantly wrestle with the age-old question of how to reduce company expenses. While income fluctuates for most businesses, expenses are something you can exercise some control over.
Expenses fall into two main categories — variable and fixed. Typically, variable expenses, as the name suggests, change with revenue. As your revenue increases, you tend to spend more to earn it, thus increasing expenses. By definition, fixed expenses do not vary with revenue and tend to be long-term commitments that should be monitored closely.
How Fixed Expenses Can Lead to Cash Flow Problems
In his book, “Mining the Numbers for Gold – How to Manage Profit and Cash Flow,” author John Tracy reminds readers that:
“Fixed expenses are like the old joke about hell: It’s easy to get into, but very hard to get out.”
Fixed expenses, while diverse, explains Tracy, have one salient distinguishing characteristic: They are a longer-term commitment to costs, and, once you’ve committed yourself to them, wriggling out of them — like wriggling your way out that fiery furnace below — is easier said than done.
Why are long-term business expenses such a problem?
Fixed expenses can have calamitous impact on cash flow because, regardless of your company’s income, those weighty financial commitments must be met.
Have a bad month and not only may you find yourself robbing Peter to pay Paul, you may also have to pawn Peter’s watch, stereo and prized Battlestar Galactica action figure collection. That would be a shame.
Cash flow is the number one culprit in business meltdowns — and nothing causes cash flow problems like inadequate management of fixed costs.
- Financial incompetence is frequently cited as a major contributor to startup failure rates, as in a study reported by Statistic Brain.
- This lack of financial management knowledge includes a lack of planning, no understanding of financing, no experience in record keeping, and expanding too quickly.
David Parrish, entrepreneur mentor, writer and business coach, echoes these warnings about fixed expenses and their inextricable link to cash flow problems in his blog post “Managing Cash Flow and Fixed Expenses”.
“As a business grows and its turnover increases, there is always a temptation to increase fixed costs. Then these higher fixed costs commit the business to regular cash outflows, even though the cash inflow may be more erratic, due to fluctuations in trade and delayed payments from clients.”
Mr. Parrish shares a cautionary tale:
A company who employed a roster of temporary employees for short-term projects made the unreasoned decision to hire those temps as full-time employees without first having some assurance of incoming work to justify the new hires. By trading a manageable, variable expense (temp employees tied for short-term projects) for a whopping commitment to fixed expense (full-time salaries and benefits) — the company increased its dependency on cash. As Parrish describes, the company was forced to take unprofitable projects for that “quick cash fix” to feed the looming cash flow crisis — a direct result of hiring employees without a valid projection that justified the fixed expense.
In the end, Parrish leaves readers with this simple, yet sage advice:
“Unless future cash inflows are guaranteed to be steady, beware increasing fixed costs if you want to avoid cash flow problems.”
Teasing the advice apart will bring you to two realizations: Cash inflows are rarely “guaranteed to be steady” (there are no guarantees), and therefore, businesses should always “beware of increasing fixed costs.” “Beware” — meaning measuring the fixed expense against budget projections. How will the fixed costs affect cash flow if there are valleys in your business earning?
While this article so far has hinted at it: The key to reducing company expenses is to know your company’s performance and cash flow numbers. For small business owners, startups, freelancers and micro businesses who cannot afford the cost of financial advisors, this means DIY.
In a nutshell, this means you should:
- Always have a plan.
- Know how much cash you have on hand.
- Project cash on hand over the fiscal year.
- Know your expenses and watch them like a hawk.
- Justify fixed expenses with cold, hard numbers — NOT gut feelings and wishful best-case scenarios
- Always use a budget.
Source: SLC Bookkeeping, March 2016
In order to avoid costly mistakes, you’ll need some help executing this to-do list, either from a financial advisor or accountant, or some software. You can also get started with some or all of the following resources:
Financial Planning Spreadsheets
Here are a few business financial planning template downloads that will help you project the effect of fixed and variable expenses — better yet, they're all free!
- Profit and Loss Projection
Project income and expenses for a 1-year period.
- Break-Even Analysis
Find out how many units of your products or services you must sell to cover your costs.
Read about the basics of break-even analysis.
- 12-Month Cash Flow Statement
Enter cash inflow and outflow projections for a 1-year period and this spreadsheet will calculate the closing bank balance for each month and at the end of the projection time period.
- Business Budgeting Spreadsheets
Interactive budgeting spreadsheets from Vertex42.
Helpful Articles About Reducing Company Expenses
Read about managing fixed costs and other company expenses:
– Emily Starbuck Crone at NerdWallet
If you are short on time and need some easily digestible nuggets of cost-saving goodness, start with these seven brief, practical and vital cost reduction tips.
– Michael Evans at Forbes.
Learn about reducing and controlling costs and avoiding traps such as “growing out of business by diverting cash into fixed assets and inventory investments.” Mr. Evans provides 10 tips for reducing costs in many areas of your small business.
– Suzanne Kearns at MoneyCrashers.
Ms. Kearns reminds us that while we’d all like to increase profits by increasing income, you can also increase profits by cutting expenses and increasing efficiency. Learn to reduce company expenses by cloud sourcing, reducing interest fees, employing time management techniques, and going paperless.
Business Planning and Financial Software
At a certain point, a spreadsheet will only get you so far. The following tools can help you take control of your business expenses and your future.
Whether your business is a startup or has been up and running for a while, LivePlan, as the name suggests, is interactive, automated online business planning software. Create pitches, business plans, budgets and forecasts, and compare projections against benchmarks for your industry.
- You are starting a business or are running a business and want easy, intuitive business planning, budgeting and forecasting.
- You are looking for planning software that will support you throughout your business’s lifetime.
- You value easy to follow business software with plenty of samples and step-by-step guidance.
Sign up for a LivePlan monthly or annual plan.
PlanGuru bills itself as the “Budgeting and Forecasting Tool of Choice” for small business, entrepreneurs, non-profits and accountants. PlanGuru has both desktop and hosted cloud versions. Whether you need to provide high-level forecasts to secure financing or create detailed department budgets, PlanGuru can help. Features include: unlimited projections, cash flow statements, 20 built-in standard forecasting methods, financial ratios, and business valuation tools.
- You believe in the value of “planning by the numbers” using time-tested budgeting and forecasting methods.
- You like ease-of-use in a tool that helps you effectively plan and analyze to help your business make decisions that are sound and effective.
- You value reporting features that include high-level KPIs.
- You’d like to collaborate with colleagues and stakeholders without the pain of printing and manually sending reports and analysis.
Sign up for a free 30-day PlanGuru trial.
If you run a small business, micro business or freelance operation, consider using Flare for bookkeeping, invoice and expense tracking, and budgeting. Flare is a full-fledged cloud accounting application that does much more than bookkeeping. Flare’s built-in budgeting will let you easily track income and expenses and compare projections against actual performance.
- You want easy-to-use, intuitive accounting software that doesn’t sacrifice features.
- You want your accounting software to show you the way to increased profits. You’d like online invoicing, expense tracking, budgeting and financial reports in one application.
- You’d like to get help from your accountant when needed (using Flare’s collaboration feature) but would like to do it yourself the rest of the time.
- You value the freedom of 24/7 online access.
Sign up for a free 30-day Flare trial.
A small business’s largest fixed cost is usually wages. If you are managing your small business payroll using spreadsheets, outdated desktop software, or a combination of apps because you couldn’t find one that meets your payroll needs... stop!
Wagepoint is complete online payroll software that processes hourly, salaried and contract employee payroll quickly and easily. Know exactly what you pay employees, contractors, and remit to federal and state/provincial tax authorities.
Wagepoint saves time and money with automations, such as direct deposits and employment record recording and submissions. Employees can even access their pay stubs online.
- Your business wants efficient, time-saving payroll management software that performs all vital payroll tasks.
- You want quick answers from a highly rated support team.
- You like the freedom of a cloud-based payroll application.
- You value the peace-of-mind that comes with knowing you are compliant with federal, state/provincial and local payroll regulations.
For More Help, Look to the Cloud
Cloud-based, software as a service (SaaS) applications can help your company reduce expenses by increasing efficiency and negating the need for hiring outside services that you could perform in-house.
Whether you want to manage business finances, manage your workforce, effectively track income and expenses, more efficiently manage documents, or track time, there are plenty of online applications for hungry business owners who want to take control and reap the rewards.
Have any tools to suggest or lessons learned to share in the comments below? A penny for your thoughts…
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