Tips for Small Businesses to Manage Operating Expenses

Running a small business feels liberating. You’re your own boss, set your hours, and strike the perfect work-life balance. Right?

The reality is you are the accountant, proprietor, service agent, and everything in between.

Balancing expenses against revenue is a tough nut to crack. There are so many potential pitfalls where your hard-earned money can disappear. That’s why poor budgeting and management are the leading causes of small business failure in the US.

Here are some practical tips that can help you manage your operating expenses throughout the year.

Track Recurring Expenses

It is impossible to control something that you can’t track and measure. Categorize all the expense accounts to track their frequency and volume. Also, add a review time for when a service needs to be renewed or supplies need to be replenished.

It might seem tedious, but recovering a couple of bucks a month from a tool your business doesn’t use anymore can save a lot annually.

Expense Categories Breakdown

Create a Realistic Budget

The only budget you need is the one that’s grounded in the actual spending of your business. Instead of under-budgeting everything and ending up frustrated, go through the last three to six months of expenses to come up with a baseline. 

Then, anticipate inflation and seasonal changes to your pricing to finalize a budget to effectively predict and steer operating expenses of your business.

Audit Subscriptions Quarterly

Using specialized tools, like accounting software, makes it extremely convenient to manage a small business. But it can lead to useless subscriptions that bleed money every month. So, set your calendar for every three months to audit subscriptions. Ask these questions:

• Are we still using this tool?
• Is there a cheaper alternative?
• Can we get one to replace two?

The same goes for internet and phone plans. If you are paying separately for these services, go for a provider that lets you create a custom bundle for additional savings. If you’re looking to switch, you can connect with Xfinity Customer Service to learn more about their plans and pricing.

Separate Business and Personal Expenses

This is one of the major mistakes small business owners make. 

Mixing business and personal expenses leaves both accounts either overstated or understated. Since you need a clear picture of operating costs and revenue, use spending tools, such as business credit cards and bank accounts, even when you are working out of your home.

Set Up a Rainy-Day Fund

Every business often comes across cash flow problems. Either clients pay late or expensive equipment breaks down. 

It is always a matter of “when” rather than “if”. And when that happens, having a rainy-day fund acts as a shock absorber, keeps you afloat, and helps you weather the downtime.

Experts recommend a threshold of three to six months of operating costs of the business, ideally. There is no need to get intimidated by this number. Just investing 5% of the monthly profit can support operations when needed.

Negotiate with Every Vendor

Vendors often have the leeway to offer discounted rates, even when you assume that the pricing is fixed. Whether it is your landlord or the service provider for your business, try to ask for better terms or bundles. 

They might not seem like much, but the savings compound over time and contribute to your reserves.

Ask for a trial period or added features to further sweeten the deal, especially when the monetary relief is not on the table.

Use Affordable Budgeting Software

Microsoft Office is one of the go-to tools for small business accounting, but there are other affordable tools that you can employ that can automatically categorize, track, and apply functions to numbers. On top of that, they can also mark unusual spending and let you download financial reports with a single click.

The upfront cost might seem like a lot, but the saved time and hassle justify it.

Frequently Asked Questions

What is the 50/30/20 rule for business?

The 50/30/20 rule is a budgeting framework that divides it into three broad categories: 50% goes to essentials, 30% to growth and expansion, and 20% to emergencies.

Why do small businesses often fail?

Poor cash flow management is one of the biggest reasons why small businesses often fail, making proper budgeting a necessary exercise.

What budgeting mistakes do small businesses make?

Failing to track expenses, setting unrealistic goals, and ignoring savings are the biggest budgeting mistakes that dearly cost small businesses.