In business, it’s common to be at either end of a delicate scale – you can be either too frugal or too relaxed with expenses. If you’re a bit too eager, you might be overspending on simple things, without realising the negative effect it’s having on your cash flow. Or you could simply be spending beyond your means, without a decent ROI to support your decision. On the other hand, you might be too focused on your safety net and subsequently be stunting your business growth, by not investing when you should. No matter your situation, it’s important to realise where your business could be using its money more wisely and where it could make better investment decisions in the future.
How do you tell if your business overspending or underspending?
To tell if your business is in fit financial shape, it’s important to benchmark your business. Benchmarking is the act of comparing your business’ cash flow to the cash flow of similar businesses. Benchmarking your business will help you identify how it is tracking financially and will also help to show if you are overspending or underspending in comparison to your competitors. Of course, there are many ways you can benchmark your business. For example, you could conduct your own research, or you could purchase financial benchmarking data to help you assess the situation. But the easiest way is to speak to your accountant.
What to do if you are overspending
So where could your money be going?
New business owners are often eager to hit the road running. But when you’re keen to get things moving it’s easy to choose what seems like the best option without doing the proper research. When purchasing essential products and services for your business, it is important to conduct comparison research. This comparison research has two benefits. Firstly, you’ll likely uncover a bargain you didn’t expect. And secondly, you’ll find the product or service which suits your needs the best, and you won’t end up spending money on ‘inclusions’ you do not need.
Do the number crunching before you buy
It seems like a fairly simple step, but it’s easy to get caught up in excitement and buy before you have a chance to think things through. When your business experiences unexpected cash inflow or growth in a particular month it’s easy to get caught up in the positives of the situation and forget about any upcoming expenses. This doesn’t mean you won’t be able to make the purchase; it simply ensures you will have considered all of your options and can purchase without stress and guilt. The best way to understand if spending the money is in the best interest of your business is to ask yourself a few questions.
- Firstly, consider your current monthly cash flow, and your expected monthly cash flow in current months. Will cash flow decrease? And if so, will you still be able to make repayments?
- Secondly, do you have any upcoming bills?
- And finally, what will happen to your bank account after you buy the product/service?
Although these questions may seem redundant, they will help you to make informed and calculated business decisions.
Plan before you buy
This step is much easier if you’ve considered everything in the above point. Once you’ve decided you can budget for the purchase, it’s time to plan on how you’ll pay for it. Ensure in this step that you use real numbers and a real-time frame with an end-date. This will ensure it won’t get lost in the mix of other repayments.
No matter your business’ financial situation, you should:
- Create goals for what you want to achieve with your expenditures
- Spend your money wisely to maximise your ROI
- Monitor your cash flow
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