Whether your business is big or small, you are going to need to keep track of your finances. In fact, if you fail to keep good track of your finances, you could find yourself running afoul of the law. That’s the last thing you want. That’s not the only danger, though. Failing to keep good finances could result in losing money that you didn’t even know was heading out the door.
For example, imagine that you are running a business in a high-rise office building. Do you know how much you are spending per month on air conditioning for your office? If you’re not keeping good finances, you could be spending far more than you need to be spending to air condition the building at night when no one is there. Or, you could be paying to air condition a building with open windows on other parts of your floor. Either one of those could lead to drastically inflated electricity costs. While it might not seem like much to pay a little too much for electricity, it adds up. Also, if you’re missing wasted money on electricity, where else are you missing wasted money?
Waste
Financial waste, much like any other kind of waste, is frequently hidden from view. You might not even notice some things. In the past example of the air conditioner, you might not notice unless you are auditing the utility costs. Waste hides in other places too. One example would be automatic spending in the budget. Many businesses have budgets for departments based on the previous year’s expenses. This is a great way to budget appropriately; you can write up a budget for your business based on the previous year’s expenses and trust that it will be pretty accurate. However, this also encourages departments to spend money they don’t need to spend so that they don’t end up with cuts to their budgets in the next fiscal year. That’s why an internal audit is so important. If you audit your business, you might find that some departments are wasting money for just this reason. You can cut thousands of dollars this way.
A financial audit can also find wasted resources. If you look into your budget and see you’re spending thousands of dollars on paper usage, you might be able to cut that down. Sometimes, that fix is as simple as encouraging everybody in the office to print on both sides of the paper. If you can get everybody in the office to adapt to this new policy, then you can cut your paper budget in half. You would never have discovered that waste without an internal audit. However, cost-saving measures aren’t always that simple.
Cost-saving
To continue the example of paper expenses, you should look into toner as well. What do you do if you are spending thousands and thousands of dollars on toner and paper? The obvious solution is to print less, but how? Well, you can email more between different employees and departments. Many printers allow you to scan paper into the machine and send it as an email. This eliminates the need for toner and paper. You can cut your budget for both of these items drastically; however, you have to have a printer that does these things. If you don’t, then you have to calculate how much one will cost. You have to then compare that to the cost of toner and ink each year. You also have to calculate how much toner and ink you expect to save. To do this, you have to do a deep dive into your finances to figure out which printing tasks are unavoidable. After all that is figured out, you can determine if a new printer will save your company money.
Budgeting
Everything discussed so far has been an effort to correct problems that have already arisen as far as spending goes. Budgeting, one of the most important aspects of financial management, involves determining how much money a business can afford to spend each year. Financial management courses can teach you to budget effectively. Writing a budget is very difficult, so some training is necessary.
When learning to write a budget, you first have to estimate how much money the business will make in a given year. Your budget absolutely must fall under that number; if the numbers are the same, then you break even. Breaking even is not ideal, but it’s better than going into debt. So, once you figure out how much money a business will probably bring in during a certain year, you know how much money you have to work with. You then split spending into two categories: mandatory and discretionary.
Mandatory spending is, as the name implies, spending that is not optional. This category includes things like property taxes, rental costs for your office space, import/export taxes, and utilities. You can try to keep certain aspects such as utilities as low as possible, but electricity is not really optional in a business setting. So, once you figure out your mandatory spending, you can subtract that from the projected earnings. That gives you the absolute amount of money for discretionary spending. Discretionary spending refers to things such as ink, toner, employees, and company vehicles. While certain parts of discretionary spending are close to mandatory, the rates are generally not fixed. For employees, for example, you do not have to pay them all the same, nor do you have to keep a certain number of employees. There’s a base number of employees you need to keep the business running, but that can differ depending on your business.
Discretionary spending is where the majority of your financial management expertise will come in handy. You’ll have to try and keep discretionary spending as low as possible while still keeping the business running smoothly. That’s one of the biggest challenges. You have to keep your costs low but not too low. If you reduce the number of employees to save money, you also cut into productivity because you have fewer workers. If you cut too deeply into productivity, your business starts making less money. So, since your business is making less money, you then have to compare the savings made from having fewer employees with the money lost due to decreased productivity.
