More and more people are taking the plunge and setting up their own business, and the small business economy is a vital part of the prosperity of an area and indeed nationally too. However, many of these businesses that start with such high hopes fail to live up to expectations, and there are still depressingly high numbers of small businesses going to the wall after only a few years of trading. Sometimes it’s for reasons beyond anyone’s control, such as economic downturns, or an unforeseeable change in the market. In other cases, the planning stage hasn’t been completed accurately enough, and the predicted profitability of an enterprise is over-estimated, or miscalculations are made in the operation of the business. One aspect of setting up a business that can have a significant impact on success or failure are the costs, so this aspect needs to be at the forefront of your business plan and execution.
Why do costs matter?
For a business to make money, it must take in more revenue than it pays out in costs. A business that turns over several hundred thousand dollars a year might on the face of it seem successful, but if that same business is paying out several hundred thousand dollars in running costs, the profits at the end of the day could be minimal – or even non-existent! You wouldn’t expect to be making much in the way of profit when you first start in business, and it takes an average of three years for most new businesses to start showing a healthy profit. However, keeping costs down is a key factor in turning a loss into a profit, as every dollar spent is a dollar that comes off your bottom line. Let’s look further into the costs you can expect to pay in business, and how to keep them down:
- Claimable costs
There are expenses you will incur in your business that you can claim against your tax bill each year, but ignoring your expenditure because you believe you can claim it back is not a sound way to run a business. It’s good practice to make sure that everything that can be claimed against tax is included in your return. However, that doesn’t mean that you should be carefree in your spending. It’s far more advantageous to be able to show a healthy profit than to operate on the principle that costs can be claimed back. Healthy accounts ensure efficient cash flow in the business, help secure further investment, and are fundamental to expansion.
- Economising doesn’t mean cutting corners
Certain costs can’t be cut if you wish to save money overall. For instance, failing to pay for an operating license, or skimping on safety measures could well end up costing you far more than the original outlay would have been if you end up paying fines or being sued for unsafe practice. You also need to think about the image of your business; for example, if you buy cheap copier paper, will it give prospective customers the impression that your business is run on the cheap and won’t provide a professional, quality service? You need to be sure that all the necessary expenses are taken care of, and concentrate your money-saving ideas on those aspects of the business that can safely be targeted.
One area that frequently gets overlooked when it comes to managing costs is office consumables. Shopping around for the best deals on supplies and equipment can save thousands of dollars a year, so it’s worth assigning the management of consumables to a specific member of staff and tasking them with finding the quality you need at the most economical price. Stockpiling stationery and printer cartridges is also a waste of money, as you are effectively tying up operating capital on shelves of paper and other sundries. Buying bulk toner cartridges may seem like a good way to save money, but if you end up with boxes full of toner that has degraded and isn’t usable, or shelves piled high with out of date printer cartridges, that is money down the drain.
- Major Purchases
Every office needs computers, printers, copiers and so on to function effectively. When you’re selecting high-value items like these for your office, consider what functionality you need from each piece of equipment before you start selecting what to buy. A flash copier with all sorts of clever functions might sound great, but if you aren’t going to be using all these functions, then you’re wasting your money. Go for items that fulfill your requirements but don’t exceed them. By the time your business has grown sufficiently to warrant the extra functionality, new and improved machines will be available that you can upgrade to. You can read more here about what you need to consider when purchasing high-value equipment.
Your business plan should include both fixed and variable costs. Fixed costs are those that you can predict and don’t depend on the turnover of the business. For example, rent for office space is a fixed cost because it will remain the same whether you are selling twenty units a week or twenty thousand. There are certain expenses that can be targeted for savings, and one of the main ones is power usage. It’s an old story, but nevertheless true, that switching off power supplies when lights or equipment are not in use will save a great deal of money over a year. If you have continual problems with lights not being turned off, it might be worth considering installing a motion-activated lighting system, which would pay for itself within a year or two based on potential cost savings. Variable costs include the price of buying in products or raw materials, so the more you sell, the more you will have to spend. The best way to economize with these types of costs is to ensure that you monitor what you are being charged by your wholesaler, and continually work to get better rates or find cheaper suppliers with matching quality and service standards.
It’s a mark of a well-run company when costs are optimally balanced between making savings and not cutting corners. Help to ensure your business is one of the success stories by looking after your costs.