Controlling your expenses

Welcome to the first article of my blog and brand new website.

It’s very exciting to run your own business, isn’t it? You can make your own decisions, obtain the profits and develop in your professional career in the direction you want.

However, it can be a bumpy road from the very beginning. You need to think of everything: finding and negotiating with customers, advertising your product or services, submitting taxes, chasing debtors while paying suppliers in time… A constant but necessary headache if you want to position yourself in the market and succeed.

This is why I’m here: to give you some tips that you can directly apply in your company. I believe in continuous improvement, a habit I practise everyday by educating myself on those areas that help me develop both as a person and as professional, especially in fields like finance.

I know you don’t have much time to waste, so let’s get back to the topic.

I have some friends, relatives and acquaintances that started their own business directly from scratch, with a limited initial investment due to lack of resources, but with an unlimited will to make their business dreams come true. Sometimes they explain to me how they are doing, how much money they’re making with a smile on their faces.

Until I start with my questions:

• Your instagram profile looks great, I wonder how much you invest to promote your account per month or year.
• You usually make customers pay 30% of the price of the agreed service upfront to cover materials. Is the cost of materials actually that high? Or is it lower?
• And my most annoying question: you usually spend 15% of your time doing administrative tasks, like raising and sending invoices, talking to your accountant, chasing debtors… Are you considering this cost when calculating the price of your service?

What I find surprising -except for the last question- is that usually they are not fully aware of their expenses. For some people, these are just “bills that need to be paid” and focus only on finding customers and generating revenue. In one of my experiences, I talked to a sole trader who only knew the total costs for one year, but not the breakdown. As long as money was coming in and making profit, there was nothing to worry about.

Of course the main focus is to make sales and building strong relationships with customers. However, as said, running a business is often a bumpy road, for that reason, controlling your expenses is the way to avoid -some of- the bumps that may come in your way, especially in hard times such as economic recessions where your revenue might decrease and costs increase.

Classifying your expenses

Usually, companies hire accountants to help them calculate their profits and how much they have to pay in taxes. Depending on your type of business and country where you are located, you are to be required to present a statement of financial position and profit or loss in a certain way or another. However, even though your business is making enough income to allow you to travel to that dream location during your well deserved holidays, classifying and monitoring your expenses will help you understand the cost structure of your business and it’ll allow you to decrease expenditure where it’s not necessary, or increase it where it can help generate more profits.

A first step could be listing those expenses by different categories and assigning those costs to each of them. Depending on your type of business and detail you need, it can be longer or shorter. The most important is that it can be useful for you. Bear in mind that the following list takes into consideration those costs that have a direct impact in your cash flow, immediately or in the future -something that I’ll explain in another article-. For example, if you’re working as an art conservator, a basic classification could be:

• Material costs: brushes, chemicals, paint and other materials will be recorded in this category.
• Employment costs: such as wages or social security.
• Maintenance or replacement costs.
• Rent: the space you are renting, naturally it must be considered.
• Marketing Costs: Instagram, content creation, lighting, promotion of ads will be recorded in this category.
• Insurance: needed just in case (some are mandatory).
• Travel expenses: taking a train or a plane to visit potential prospects.
• Exceptional costs.
• Finance costs: the interest you pay for loans.
• Taxes.

This list can be much longer and/or more detailed, or you can even add subcategories according to your needs. Finance professionals such as accountants might classify expenses at much bigger detail, to produce reports for investors, finance suppliers, or even the government, but they need to follow strict regulations to present financial statements in accordance with accounting principles. The point of this exercise is not to distract you from your business, but to help you make better decisions and have a strong foundation through cost control.

Some examples of the benefits you can obtain are:

• Better pricing
• Better budgeting
• Better cash flow control
• Higher profits

Despite it can be a little time consuming, especially if you receive a fair amount of invoices every single week that even your accountant needs more time than usual to process them, I strongly recommend that you are involved as much as you can in the process.

Thank you for reading my article. I hope you liked it and you find it useful. If you have any questions or need some assistance, feel free to drop me a message through the contact form.