For a business to be successful and stay that way requires some knowledge of business cost management. Cost management is simply the preparing and calculating of your business finances so that you can determine ahead of time when expenditures will fall due so that you can alter or regulate cashflow. Through cashflow mastery and cost management, businesses can regulate their cash accounts, increase productivity and stay on top of risks to profitability.
Business Coach David Guest in Melbourne believes that with the right guidance even those difficult to estimate expenses can be factored into your financial reports so that you get the best guess effort possible for helping you regulate and control cash flow in your business.
Here are David’s tips for helping you deal with unknown expenses:
- Start with what you know. Your overheads, such as lease payments or rent on business premises can be a regular fixed expense against which you can compare other more variable expenses. Use the history of past payments to calculate your variable expense costs as a percentage of your overheads or other fixed costs.
- Talk to your suppliers. If you have old accounts to go back to you can calculate an average expense and then use this for your reports. When you don’t have old accounts call the supplier and ask them what the average monthly spend is for someone with a similar type of business to yours. Beyond that you can ask the supplier to give you an estimate of usage/consumption for your industry.
- Use percentages for CPI linked expenses. There are many business expenses that vary significantly due to external factors such as CPI, global economic circumstances and market trends. Rather than attempt to ‘know’ the actual dollar value, monitor the percentage points by which these particular expenses vary whenever these external factors hit. For example, fuel for your vehicle fleet changes when ever the oil price is impacted, rather than track the price, track the flow on affect of an increase or decrease in fuel prices as a percentage of your overall fleet cost.
- Look for patterns in your finances. Whether they’re annual, seasonal, monthly, weekly or hourly, there will be patterns in your expenditure data that you can use to work out some of those difficult to estimate numbers. For example, let’s say whenever you spend more on marketing, your telephone bill increases, your shipping costs go up, so do your stationery and printing costs. This would be a pattern that you’d find in your finances that you’d be able to use to get those variable unknown expenses better guestimated.
- Be conservative with your numbers. By being conservative, I mean don’t be afraid to over estimate on your expenses and under estimate on your income. Being overly optimistic with your numbers can lead to serious shortfalls in your cash flow, but doesn’t mean that you set low targets or performance budgets. It means aiming high with business objectives and being old fashioned about your financial predictions. Think about the number of home renovation television programs where people have these huge visions for their project but their budget and money management for the renovation is what lets them down in the end and so they have to compromise on the finish or the scale of the project. Learn from that and have the big vision but also get the numbers right, so that there is no compromising.
- Talking to your Industry associations. If you’re getting into a completely new line of business or starting a business for the first time, it’s likely you won’t have any previous data or accounting history that you can go back to. This is where it pays to do your research. Talk to other people in your profession or industry and find out as much as you can about the costs and expenses of operating. Make contact with your Industry Associations and ask them about what you can expect your set-up costs and on-going running costs to be. Associations and other government and semi-government organizations can be a wealth of information including giving you insight into any upcoming legislation that may impact on your profitability and noteworthy trends.
- Have a contingency. It’s not always easy to be precise or even close to actual costs, so cover the downside and protect yourself with a contingency fund. That way you can be sure that the expected unexpected costs can be handled without your cash flow taking a huge hit.
If you’re not currently keeping on top of your finances and cost management because of overwhelm or uncertainty about how to get your numbers into a useful and meaningful report, then working with a business coach like David Guest in Melbourne can help you gain control over your business cashflow.