Ten Strategies to Avoid Small Business Overspending

Woman in business attire balancing two balls one of expenses in red and revenue in blue.

How to Keep a Tight Rein on Business Expenses

A business owner has much on their plate, so managing the finances of a small business can be challenging. Consequently, it can be easy to spend more than anticipated and not discover the overspend until the cash flow gets tight. However, implementing the following processes will help avoid this potentially disastrous situation.

1. Create an Annual Budget

The first step to controlling costs is to have an itemized budget. A budget will provide you with benchmark figures and can be used to set spending limits for particular items. Without a budget, your first indication that you overspent will be a lack of cash. If you reach that stage, it will be too late to get spending back on track.

2. Keep the Accounts Up to Date

A budget will be useless if you have no actual figures for comparison. You must keep your accounts up to date so you can track spending to date. Try not to make updating the accounting system a once-a-month task. Instead, aim to post accounting transactions daily. Keeping the accounts up to date will provide you with better management information and make the job less of a burden at the month-end.

3. Analyze Budget Variances

Periodically analyze budget vs. actual variances to identify items of expenditure where there has been an overspend. A month-end review of budget variances will not prevent a prior overspend. Still, it will highlight areas of expense that need addressing and prevent continued overspending.

Related: 10 Reasons Why Your Business Needs an Annual Budget

4. Analyze Spending Trends

In addition to looking at items of expense significantly over budget, it will also help to analyze ongoing trends in spending. The best way to do this is by looking at the percentage variance over time. Suppose, for example, that the raw material variance has moved from 10% under budget to 1% in only six months. In that case, it would indicate that prices are creeping up, and action may be required to get the cost back under control.

5. Adjust Spending to Match Income

If sales are significantly lower than budgeted, spending will need to be reduced to match the lower income levels. Identifying this issue comes back to the need for a budget, up-to-date accounts, and completing periodic budget variance reviews. If lower sales are likely to continue, it would be advisable to update budgeted sales and spending accordingly and work to the revised spending limits.

6. Implement Strict Purchasing Controls

If you have employees, it is advisable to have documented purchasing procedures. These procedures should state who is authorized to make purchases and the maximum value of orders they may place. There will also need to be a system to approve purchase orders and invoices. If there are no procedures, employees might purchase items that are not required or inadvertently take spending over budget.

7. Periodically Review Vendors

Vendor prices can increase gradually over time, leading to overspending. Companies also tend to offer the best deals to new customers. Therefore, it is advisable to carry out a periodic review of regular suppliers to ensure that you are getting a competitive price. First, make inquires with alternative suppliers to assess the current market price. Allow existing suppliers to lower their charges, if appropriate. Then, if it will cut costs, swap vendors to get the same quality product or service at a lower price.

8. Obtain Multiple Quotes

When looking for new suppliers, always obtain multiple quotes. And, don’t be shy about telling vendors they are in a competitive bidding situation, even for small items of expense. Almost every salesperson has some room to maneuver on price. Pushing for the best price on every purchase will help keep costs down.

Related: 6 Tips for Managing Your Business Finances

9. Guard Against Fraud

Overspending can also be caused by fraud, which can often be perpetrated by the people who work for your company. Purchasing controls and security measures protect inventory and restrict access to cash and bank accounts are a must in any size business to prevent fraud. Be aware, too, that overspending on certain desirable or valuable products can also be a sign of pilfering.

10. Never Stop Monitoring Costs

All the above steps are best treated as ongoing rather than one-off projects. Continuous monitoring of costs will allow action to be taken before overspending has a significant effect on the profitability and cash flow of the company. If you let your guard down, spending can get out of control, even when the business is booming.

Related: Ten Cash Flow Management Tips for Business Owners

The Bottom Line

Implementing and documenting processes and analyzing variances might appear overkill for small businesses. Nevertheless, cost control is essential for any sized business. Taking the above steps will help you control costs and spot overspending trends before they get out of control. Having the procedures and processes in place now will also stand you in good stead for when the business grows.

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