2008-12-31

Article: Mind Your Spendings

To keep your business from falling into the overspending trap, follow these 6 useful tips on cutting down on expenses and minimizing cash outflows
By Henry Ong;
Source: http://www.entrepreneur.com.ph/

Putting up a new business can be so demanding and stressful that even rational people can sometimes fall into the overspending trap.

In your enthusiasm to make your business succeed, you yourself may fall into this trap and face the following undesirable situations:

High rental cost. By getting office space that's much too big for your startup business, you can get strapped for cash due to your high rental cost. This mistake would be all the more painful if your business doesn't pick up soon enough contrary to your expectations.

High depreciation cost. It's not advisable to buy top-of-the-line office equipment and furniture when they are not essential to the success of your business. They not only will be a big drain to your initial capital investment but also result in high depreciation expense.

Too many employees. In your desire to make everything in your business move smoothly, you may end up hiring more employees than you really need. To avoid bloating your payroll, see first if you or your manager could handle the functions of the positions you want to create.

Overstocking of inventory. Because you want to take advantage of a supplier's volume discount, you might order initial inventory that's way above your normal operating requirements. This can prove to be a bad deal when the cost to maintain the excess inventory proves to be higher than the supplier's volume discount.

Credit line abuse. You can end up acquiring unnecessary debt when you take on your bank's offer of a very high credit line. You can then be tempted to treat your credit line as capital infusion, enticing you to go on an expansion binge that invests heavily on capital expenditures. Because you used short-term financing for the long-term investment, however, you soon begin experiencing cash flow problems and abnormally high interest costs.

There are many ways to cut down on your expenses and minimize your cash outflows, but the most important are the following:

Develop a budget. You need to draw up a budget for each department of your company, listing all monthly expenses, and then make it a point to monitor and evaluate this budget regularly. Budgets are a reliable benchmark for measuring your actual performance. By sticking to your budgets, you will be able to curb your impulse purchases more effectively.

Promote accountability. Once you have drawn up your budget, you need to authorize only a few specific people including yourself to approve or make purchases on behalf of your company. By coming up with a formal approval system, you will be able to develop greater accountability and stronger control over expenses.

Update your bank account regularly. You need to monitor your cash position daily to avoid unexpected cash shortfalls. By knowing your cash position at any time, you will not make the mistake of tapping your bank credit line to finance expenditures for which you have enough cash in the bank in the first place. You will thus be able to avoid unnecessary interest expenses.

Try to barter your services and products. The barter system or "ex-deal" is a good way to reduce your inventories, increase sales, improve cash flow, and use the excess capacity of your business. For example, if you are in the restaurant business and you need to hire a marketing company, you can offer to pay for its services with free meal vouchers instead of cash. This way, you not only reduce your cash outflow but also reduce your inventories and put your restaurant's excess seat capacity to use.

Prioritize your capital expenditures. You should invest in capital assets such as computers, equipment, and transportation only when you absolutely need them. Make sure that they will create a positive return on investment for you in the long term. For example, before purchasing a new computer, you need to first compute the net savings you will get by investing in it as a replacement for your old one, whose slowness could be costing you a substantial sum in overtime pay and delayed sales deliveries. Make the purchase only if the net savings are big enough.

Create an incentive system. You can encourage your employees to cut down on company expenses by developing an incentive system for savings generation. For instance, in a particular department, you can reward the employees a certain percentage, say 10 percent, of the total savings they realize at yearend from their approved budget. In this way, you not only cut down on company expenses but also share with your employees the benefits of the savings generated.

In some rare instances, it may be a good idea to spend heavily on such crucial aspects of the business as marketing and advertising. This may be unavoidable particularly if you are just starting up with a new brand. Still, such expenses should always be carefully budgeted and monitored, and if you are having difficulties justifying them and certain other major expenses, it is always advisable to consult your accountant or a financial advisor.

Henry Ong, CMA, RFP, is president and COO of Business Sense Inc., a financial advisory and consulting firm that helps small and medium businesses. Business Sense is affiliated with the International Network of Certified Public Accountants. You may reach him at hong@businesssense.com.ph or log on to http://www.businesssense.com.ph for more financial tips online.

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