As a growth stage entrepreneur, you’re constantly thinking about ways to grow your Company.
An important thing to consider as you grow is keeping expenses on track. We have learned that growth can suck cash and a big part of that is expense management.
This begs the question: Do you have an expense management process in place that effectively cuts unnecessary business expenses?
At New Economy, this is on our minds too.
Why, you ask?
It aligns with our efforts of helping you gain control of your finances to make smart decisions to build and grow your company.
In this article, you will learn:
- What an expense management process looks like
- What types of questions to ask when identifying expenses to cut
- How to actually cut or reduce expenses
- 3 key takeaways related to cutting business expenses
Let’s dive in.
What is an Expense Management Process?
There are a few important things to discuss here.
First off, before we get into the process itself we’d like to quickly cover an important financial tool.
Every business should have a detailed budget. The budget should be prepared monthly and be detailed by line item (Refer to our blog post on top 4 financial tools). In this case, our focus is on the expense line items. If you don’t have this in place, you should.
Why? You are making important bets and decisions on where you need to invest your resources to achieve your goals.
Ok, now we can move on to the process which can be achieved at a detailed operational level and at a higher financial level.
Let’s start with the detailed operational level. The benefit here is:
- You are ensuring you are obtaining the proper tax deductions
- You are able to manage expenses
- You are going to get more insights to budget
- You are minimizing fraud
Every business is different and there are employee expenses such as travel and meals and then business expenses such as inventory purchases and marketing expenses.
Here are a few keys for every business regardless of the type of expense:
- Have a written policy that is followed by all
- Keep everyone from employees to managers accountable to the process
- Ensure the process has built into it proper documentation such as expense reports and purchase orders
- Ensure the process has proper approval built into it. Meaning, make sure a manager is approving the employee expense report or purchase order
Moving on to the higher financial level. The benefit here is:
- Having data to make timely decisions
- Knowing what is on-track or off track
- Identifying root causes of overspending
- Fixing problems real-time
Here the process goes back to the budget we discussed. At month’s end, the actual amounts for all expense line items should be compared to the budgeted amounts. All line items should be analyzed to determine what we are learning.
For instance, if a line item is over in a particular month, why is that? Maybe it’s a timing issue and we had to front-load expenses and no additional action is required. Or maybe, the marketing team has overspent and this needs to be brought to their attention to reduce expenses in a subsequent month to keep things on track.
The key here is to create both types of processes, put someone in charge of managing them, and use the information you are getting to cut business expenses to help you achieve your financial goals.
What Type of Questions Should We Ask When Looking to Cut Expenses?
We believe cutting expenses to achieve your financial goals is both an art and a science. You don’t want to simply cut an expense because it is over your budget. Maybe the expense that is over budget is helping you to achieve your business goals. In that case, why would you cut it?
This leads to our first question. We like to ask: “Does this expense get us closer to achieving our goals?”.
The question is to get you to really think about where you are allocating your capital and get you to prioritize. If the expense is mission critical, then we often advise to proceed with caution and perhaps find other expenses that are not as much of a priority.
Another important question to ask yourself is: “Why is this expense over and above the budget?”.
We have found that getting to the root cause often requires us to go deep. Meaning, we try to ask why at least 5 times to get to the bottom of it. Here is an example.
The marketing budget is over budget for the month by 25% or $15,000 but why:
- Why 1x – Because the marketing team overspent
- Why 2x – Because they needed additional support to achieve lead generation
- Why 3x – Because they underestimated the resources needed
- Why 4x – Because their original submitted budget was not scrutinized enough
- Why 5X – Because the process for establishing budgets was not followed
As you can see, as you keep going deeper you get closer and closer to the real why. And by having the real answer you are able to make a smart decision. You can decide to re-forecast and increase the budget over the remainder of the year. Or you can decide to work with the marketing team on staying on budget and lower expectations on lead generation based on the resources deployed.
Lastly, another favorite question is: “Who is accountable for this expense line item?”.
We believe that whatever we measure and manage will improve and get better. And part of this is giving responsibility to team members to manage and own the number.
So back to the example above, we would suggest that the marketing team leader is the person that should be taking ownership of approving the budget for the marketing team. This individual is now responsible for providing thoughts and actionable insights on getting the budget back on track. Never underestimate the power of “who” …..as in, who is responsible and accountable for this.
How Do We Actually Cut Expenses?
This is a delicate topic. But as your Company is growing, you may find that expenses naturally start to grow. Growth sucks cash in the form of expenses. But cutting expenses is one way to help you stay on track for achieving your business goals.
Here are some tips for cutting expenses:
- Communicate your “revised vision” with the reduced expenses in the form of a re-forecast to your team. This paints a new picture of what we are aiming for on the expense side. And call out those specific line items and explain the why behind them. The point is, involve your team in this conversation.
- Have open and honest communication with your vendors. You need your vendors just as much as your team and customers. They are helping to provide the goods and services needed to grow the business. So inform them by communicating timely and clearly so they can plan ahead.
- Continue to hold managers accountable, ensuring they are driving the change needed to reduce expenses. This should be emphasized as a top priority that needs to follow through based upon an agreed timeline.
- Keep banging the drum so that your expense management process is followed by all. Let everyone know they can play a role here to ensure the company succeeds.
So as you can see, there is no silver bullet. No doubt you can focus on certain line items but we encourage our companies to think before acting and not making quick decisions. We like to take a thoughtful approach and balance the tension between the short-term and long-term goals of the business.
Note, per the Small Business Administration one of the top reasons Companies don’t make it is they run out of cash. And the reason they run out of cash is they have more money going out in the form of expenses than money coming in in the form of revenue.
So this is a financial discipline worth investing in for your business.
So one last question, how is your expense management process and what needs to change?
3 Key Takeaways Related to Cutting Expenses
If you want to build and grow your business, you need to make sure you are keeping an eye on expense management.
Here are three key takeaways related to reducing your expenses:
- Make sure you have done the hard work of building a detailed monthly budget. Review the budget versus actual by line item each month. Reflect on what you are learning. And determine what may need to change and re-forecast based on your learning.
- Lean into your process. Make sure that you have an expense management process in place that is followed by all. Assign one manager to oversee this to make sure that they are banging the drum on the expectations.
- Assign team members to be accountable for specific line items. Have them own the expenses and be prepared to offer up the “why”, suggestions for improvement, and take on the responsibility of the execution of any change needed.
New Economy Team Members are Experts in Accounting for Entrepreneurs
If your Company is off track and expense management isn’t your thing, you struggle with building budgets that properly allocate funds, or you want to gain control of your finances to make smart decisions to build and grow your business, New Economy is an excellent partner.
We’ll help you get your accounting done, and done right.
Schedule a time to meet with our Founder, Jeff, and discuss how we can add value to your situation.