Expenses are a necessary part of all businesses. Companies of all sizes will incur expenses outside of fixed costs. But there are a number of other discretionary expenses that can be incurred in the course of running a business that, if poorly managed, can have a hugely detrimental impact on your profitability.
Need to know summary
- Ensure you have sight and knowledge of all your financial outgoings, and they are correctly categorised
- Have a clear expenses policy which suits the business, but staff understand and adhere to
- Set a limit for how much employees can spend without prior approval
- Consider a purchase order process as a core component of your finance function
- Think about investing in an automated expense management system which will reduce budgeting time and provide valuable financial insight
These expenses, which may be incurred by individual employees, can cover areas such as travel, entertainment, stationery, or professional subscriptions. Managing these expenses can be a headache for the SME business owner and members of their finance team. Uncontrolled, these expenses can be a huge drain on the working capital of the business. At the same time, delayed filing of expenses from employees, can cause huge problems for cash flow forecasting, whilst tardy repayment of employee-incurred costs can cause personal financial issues and loss of morale.
So, what can SMEs do to control their incurred expenses and improve how they are processed through the business?
1. Analyse what is being spent
Expense analysis is a vital skill for any business owner. To ensure the longevity of your business, you must have visibility of where all the money is being spent. Keeping an eye on your balance sheet will help to keep your expenses in check overall.
All outgoings need to be tagged and categorized for expense analysis to be accurate. There are four types of expenses you might incur which should all be recorded on your balance sheet:
- Fixed expenses – These are expenses that are payments you have very little control over as they represent an obligation to pay, such as rent, mortgage or equipment leases.
- Variable expenses – These are costs that change as the quantity of the good or service that a business produces changes. An example of a variable expense would be payroll for a company with a large amount of freelance personnel, or overtime expenditures.
- Periodic expenses – These are ones that happen infrequently. They can be hard to plan for, such as costs incurred for unexpected repairs.
- Discretionary expenses – Money spent by a company on things such as advertising or product development, that can be reduced temporarily without affecting business.
Many employee-incurred expenses will fall into this last category, which is the easiest one to improve with changes in behaviour and process. Firstly, make sure all discretionary expenses are tagged
appropriately, for example; travel expenses, marketing, office equipment and entertainment. Then analyse how expenses are being incurred over a set period – monthly or quarterly – and identify areas where savings could/ should be made.
2. Set an expenses policy
Many small businesses may not have had the need to ever set policies on what can and cannot be claimed as an employee expense. Setting clear parameters on what your policy is, the process and timeframe for claiming and your repayment terms will help your employees align with your wider cost-control ambition. It will also ensure employees don’t sit on accumulated expenses and reduce any unintentional bad will about expected repayment windows.
3. Set limits for pre-approval
One of the easiest ways of improving visibility of spend is by setting a limit (or lowering an existing one) for how much employees can spend without prior approval. This limit will need to be balanced with the practical requirements of your people but can be a useful stage in considering whether expenses are necessary now, or at all, before they are incurred.
4. Consider a purchase order process
One of the most effective ways to gain control of larger discretionary and variable expenses is to ensure you have a purchase order process as a core component of your finance function. Purchase orders ensure that the spend is already allocated out of the budget, which helps with forecasting and cash flow management. For much larger purchases, they can create a binding legal contract between you (the customer) and the vendor, by proving both documentation and protections for both parties. They should spell out a variety of important concerns, such as pricing terms and the quality and quantity of goods and services to be delivered by a certain date.
5. Investigate expense management software
Automated expense management systems are quickly becoming an integral part of the technology stack of businesses of all sizes. They can provide businesses with a range of benefits while streamlining a process that can be labour-intensive for owners and finance teams.
One of the principle benefits is the amount of business insight the platforms can provide. The more data you have, the better you’ll understand your business and the better you’ll be able to make decisions on its behalf. Expense management software can not only track and manage your company’s expenses but also learn from them and distill that information back into your business budgeting.
As many firms move to hybrid working, cloud-based expense management software helps keep your team agile and able to incur essential business expenses wherever they might be, without having to keep paper receipts until they are back in the office, thus speeding up the budget recognition process.
At Capify we offer a range of business loans to help support your business.
If you would like to speak to one of our advisors about funding an investment or boosting your working capital, we’d be happy to guide you through the process. Give us a call today on 0800 151 0980. Alternatively you can check to see if you’re eligible for one of our loans with our online eligibility checker.
