Incurring expenses is usually the focus of many business owners. Generally because it’s the easiest and most visible thing to look at. However, there are other considerations for controlling costs. The first one is to look at how you manage the flow of money overall. By this I mean your budgets.
I want to reiterate that if you spend the time upfront defining your budgets, then it’s a lot easier to manage the costs that are incurred down the track. It also allows you to then delegate the management of this process to the bookkeeper or financial controller.
1) TOP TIP: IMPLEMENT A SYSTEM THAT YOU ONLY PAY ON PURCHASE ORDERS
One of the most effective ways to control costs is once you have your budget defined, is to then implement a system where you ONLY pay invoices on purchase orders. This will stop employees ordering willy nilly in its tracks. Because as soon as you issue the edict to staff, you make sure that the accounts people ONLY pay where a purchase order is quoted.
For staff to spend money, this means that they have to request a purchase order from the accounts person. They would then check the budget to make sure that the amount is allocated, and that the person ordering the goods is authorized to make the order. If the answer is yes to both of these, then the accounts person would issue a purchase order which the person ordering the goods when then quote.
So when the invoice is received by the accounts person, they would then check that the goods have been delivered and that there is no outstanding issues to resolve. They would then prepare a cheque or online transaction for payment.
If there is no purchase order assigned, then they would refer it back to the supplier and/or the staff member who ordered the goods to resolve. I suggest being tough here – if its not assigned, then you don’t pay. It’s then up to the employee to settle the account – well essentially you probably would, but when there’s a perceived consequence, it usually puts the fear of god into them! They usually don’t spend your money again after that scare!
2) VALUE FOR MONEY
One of the areas that most business owners are usually fairly comfortable with is controlling costs. But let’s just go over the basics again. As a business owner, you should set a key performance indicator for your financial controller to be responsible for value for money. This means continually looking for different and innovative ways to control costs as a way of impacting your business’ profitability. A dollar saved as a cost, goes directly to bottom line profitability. Some businesses find that by implementing tight cost controls and questioning the need for all spending has achieved the same profitability improvement that would otherwise have had to come from a substantial increase in sales.
Now I’m about to briefly go through a checklist that is available in the ‘Essential Financial Management Templates’ workbook which you can purchase from our website.
3) SHOP AROUND FOR DEALS
The first rule of thumb is to shop around. No matter who I’m dealing with, whether it’s a good friend or colleague that’s providing the service, I always compare it against two other quotes. Now, I usually don’t go straight for the cheapest option, but it does allow me to then go back to the original person and have an open and honest discussion about reducing the original cost. I always think about a comment one NASA astronaut once made when being asked about his feelings about being in space on a new space shuttle for the first time. His reply was, “how would you feel if you were about to fly in craft millions of mils into space, where your shuttle safety is completely reliant on our governments policy of sourcing the cheapest part possible.” Point well taken. It’s not always about going for the cheapest option, but it is about ensuring that you’re getting value for money.
4) COMPARE ACTUAL COSTS TO YOUR BUDGETED COSTS
Another point is to always review costs on an ongoing basis. I would suggest monthly – lets not wait until the end of the year or when we’re in strife, we should always be focused on ensuring that we’re getting value for money at all times. When you are going through your reports with your financial controller, use this as a time to look over your costs and compare them to your budgets.
5) THINK OUTSIDE THE BOX TO CONSIDER OTHER OPTIONS
Also be sure that you’re aware of what’s happening in the market place. Is there a new player who can provide competitive prices, or is there an online option available to you. Perhaps even a global possibility for you to explore. I’ll give you the example of a website. I had a friend who rung me to ask my opinion about a quote she had received on building a website. The quote was for $10,000. I referred her to a website called elance.com that has a global online bidding community. She placed a project brief for someone to build her a website and ended up getting one built for $1400. She was delighted with the quality and the end result – the only thing she did say was that she had to spend more time communicating with them (as they were overseas) but she was happy to do that to save herself $8,600!
6) CONTINUALLY REVIEW YOUR STANDARD PROVIDERS FOR THE BEST PRICES
Are there areas in your expense items that are being deregulated or additional players coming into the market. For example, electricity or gas providers, telephone providers, etc. You may be able to save money by consolidating accounts on your mobile phone bills. There are also telco providers that actually provide a free assessment service to see where they can save costs for you – use them!
7) REVIEW ELECTRICITY COSTS WITH AN ENERGY AUDIT
And while we’re on electricity costs, have you conducted an energy audit in your business to ensure that you’re not needlessly wasting money? For example, some energy reduction strategies could include turning off lights in offices that are not being used, or turning off the air condi8tioning system, photocopiers, printers and computers at the end of the day. Is there the potential to use electricity in “off peak” periods. Put timers on plant and equipment and put signs around your business reminding people to turnoff the lights and to save energy.
8) REIGN IN THE STATIONERY BILLS!
One of the biggest expense items in a business can be stationery. A lot of business owners won’t pay a $10 delivery charge to their business, but they will send an office person to pick up the stationery, at $25-30 an hour, plus allow them to purchase “whatever they need”. Have you ever tried not to buy an impulse item at a stationery store? It’s impossible – take it from someone who knows! Look also at the purchases that are being made in small quantities – can money be saved by purchasing in bulk – especially in printing. Make sure that one person only has the responsibility of purchasing stationery and ordering printing so that its not open slather of everyone in the business and they can also make sure that the items are actually required.
9) ESTABLISH A TRAVEL POLICY
Do you have a travel policy in your business? If so, it should clearly outline the class of air travel, grade of hotel accommodation and what expenses can be incurred and reimbursed. There are numerous accommodation site available now days that allow last minute bookings at a greatly reduced cost – have a look at wotif.com to see what I mean. Using this site means that you can actually book staff into 5 star accommodation at 3 star prices.
10) CHECK BANK CHARGES & FEES
Also consider bank interest, fees and charges – these should be checked regularly as banks often make mistakes in charging fees and interest. You should also maintain a record to interest rates and margins quoted by banks and shop around for the best interest rates.
11) REVIEW VEHICLE ALLOWANCES
Vehicle allowances are also another area of costs that can rack up pretty quickly when employees cotton to the fact that they can receive a nice little earner using the ATO vehicle allowance figures. If you have people using their vehicles a lot, you may want to consider whether you purchase or hire a pool car. Often the amount of money that you can spend paying vehicle allowances can actually pay off a company car – therefore building your assets at the same time. Another way to hand this is to offer to pay for all petrol costs instead. So everything an employee fills up, they just need to hand you the receipt and they’ll be reimbursed in full. This still adds up cheaper than paying a vehicle allowance – and is easier to budget for in your profit and loss projections.
Another way to further streamline this process can be to have fuel cards that link into a single account that you pay each month.
12) ESTABLISH BOUNDARIES FOR EMPLOYEE EXPENSE REIMBURSEMENTS
Always establish the boundaries for expense reimbursements in your business. Incorporate this into your induction program in your business so that everyone is extremely clear of the expectations. This is particularly relevant if you have a business development person who wants to have an “entertaining” budget. I usually empower people in this regard by providing them with a profitability target on sales made – which incorporates things like their entertainment budget. But more often, I’ll act6ually sit with them and run through ways to provide potential clients with value, without expenses “wining and dining” experiences. In fact, in my IT days, where everyone apart from me had a corporate credit card for “smoozing”. I was more effective with my sales because I would take people for a coffee.
13) MAKE SURE THE INVOICES YOU PAY ARE CORRECT
Advertising is another area where businesses can incur lots of charges. I’ve covered off on advertising in another CD in the Jump Start Your Business Series, but one thing I want to mention here is taking care with “bogus” invoices for advertising and checking that all invoices are actually for valid advertising. Now if you have a purchase order system or a centralized purchasing process, then you won’t get caught out on this one. But a few years back there was a scam where people were receiving invoices for “advertising” and then pressuring the accounts payable staff to pay them. A nice little earner made from the lack of internal systems in 99% of companies.
14) BEWARE OF OVERCHARGING!
I want to finish by talking about overcharging and the need to always check invoices against contracts or agreements. This includes rental agreements, any supplier invoices, etc. If in doubt, don’t be shy of asking the supplier to provide more details or query any inconsistencies. Errors are easily made and usually suppliers are extremely apologetic should a discrepancy be discovered.
15) ENSURE THAT YOUR PETTY CASH HAS A MONTHLY LIMIT
Despite your best planning, there will be cases when you need to have access to some petty cash – that is small amounts of cash for purchases that are fairly minor and random.
Make sure that the initial petty cash amount is realistic – if it keeps exceeding the amount each month, you need to establish where the cash is being spent and then put alternative strategies in place. However, I would strongly recommend setting a monthly limit that staff are aware of – for instance set a monthly amount of $150. Once it’s exceeded, it’s exceeded.
Taking time to reassess your costs will have a direct impact on your bottom line. However, be careful that you don’t focus more on cost minimization than opportunity creation. It’s easy to cut costs, but downright difficult to create more income. So be sure that your attention is focused in the right direction.