Individuals aren't the only ones who can have bad spending habits — sometimes businesses do too. Find ways to curb your business's worst spending habits.
By Chad Preston
You have to spend money to make money, so the expression goes. But, obviously if you spend too much it’s not good for you or your business. Just as you can develop bad habits in your personal finances, a small business’s management can lose its grasp on the company’s financial well-being. However, by taking a fresh look at the money that flows in and out of your business and your overall business planning, you can do much to rid yourself of negative financial habits.
Where Does It All Go?
Rhonda Abrams, president and chief entrepreneur of The Planning Shop, a Palo Alto, Calif.-based publisher of books for entrepreneurs, details how many small businesses misspend their hard-earned dollars.
- Create a marketing plan.“I think one of the main ways they misspend their funds is how and when they market,” Abrams says. “Rather than have a consistent marketing plan, they often do spontaneous advertising. Marketing needs to be planned out so that you’re repeating your message and you’re making sure you’re reaching the right target market.” If there is no strategy behind your marketing plan, it will show in your return on investment.
- Shop around. “Small businesses are very busy, they get a provider or source and if they’re satisfied or reasonably satisfied they stick with them and don’t regularly check prices or do other things to shop around to make sure they’re getting the best price or competitive prices,” she says. Revisit your agreements with the providers you have for telecommunications, shipping, credit cards, Internet service, insurance, etc., at least once a year.
- Avoid finance charges. “People get into problems with not being able to pay their bills on time or not managing when they pay their bills, so they slip even by a few days and they start getting finance charges on their loans or credit card amounts. When it just slips through, one can encounter very hefty finance charges when they’re not paying attention.”
- Don’t over-purchase inventory. Abrams says that this is a larger issue in situations where a business has perishable goods, such as a restaurant or florist. “But even in businesses that don’t have perishable items, we often over-purchase our inventory and we are wasting money by having it sit in a warehouse instead of using it.”
- Don’t always buy in bulk. “We tend to believe that buying something at a lower price when you buy it in bulk is always a better choice,” she says. “But having a lot of your money tied up in inventory keeps you from being able to grow your business. It’s often better to spend more per item but have less money in inventory that can age, get lost, get stolen, or just not get used and sit there for awhile.”
- Take care of employees. “Many businesses don’t think about providing a good work environment for their current employees or competitive benefits for their current employees,” she says. “They fail to really address how to treat their employees well and they have high turnover. Turnover costs a lot of money: Looking for new employees, training employees, having people dissatisfied while they’re working—all of that really costs a business money.” It isn’t as apparent as some expenses, but employee turnover can negatively impact the bottom line.
- Send out invoices in a timely manner. “You would be totally surprised at the number of entrepreneurs that fail to send out their invoices in a timely manner,” she says. “They’re very good about paying their bills but not very good at sending out their bills to their customers or clients and that makes it difficult for them to be able to pay their own bills.”
Tim Berry, author, speaker, and president and founder of Palo Alto Software in Eugene, Ore., says that it’s not always overspending on line items like advertising that’s a problem; the solution could be in sound planning and structural processes when it comes to a small business’s budget and finances.
According to Berry, small businesses may suddenly feel their spending is out of control because they’re being pulled into spending areas by opportunities. Failing to plan means they haven’t budgeted for new expenses. Most small businesses are going to pursue new opportunities anyway, which can be good and bad, he says. It’s good, he says, because a business needs to be able to follow opportunities when they present themselves. The bad side is when there’s overspending due to inattention or lack of follow-up, or a failure of responsibility or ownership.
“The most important cause of overspending is failing to really assign ownership of different spending categories within the business and then following up on that on a regular basis with the budget,” Berry says.
“I think there’s a structural, sort of a system problem that’s more likely to solve the underlying problems than to go one by one into ‘Here’s how we can reduce costs,’” he says. “You change the system and introduce the planning process into the company so that all the managers know what their responsibility is, what they’re supposed to be spending, and that they will be held accountable for the difference between what they’re supposed to be spending and what they actually spent.”
Abrams agrees that preemptive planning can decrease many financial issues that can arise, saying that many financial issues can be attributed to not doing an annual business plan. “Going through an annual business planning process and really setting your goals and strategy for the year, really looking at what products and services you’re going to sell, who you’re going to sell them to, how you’re going to sell them, what things you’re going to do and what things you’re not going to do, really helps give you a guidance for how you spend your money,” she says. “It is the single best way to make sure you’re not doing impulse purchases on products, services or inventory.”
Time is Money
Entrepreneurs are busy, Abrams says, and this is another big reason small businesses can get nickeled and dimed by small and overlooked financial leaks.
“Most of us would rather be making money than saving money,” she says. “I would rather spend my time going out and getting a new customer, building a new product, doing things that will increase my income than sitting down and trying to find ways to cut expenses. That’s not necessarily a bad thing, you just have to carve out time to make sure that you’re still taking care of the financial aspect of your business and the dollars and cents.”