Ever wonder what gets a business into financial trouble? It’s usually one of two things: not enough money coming in, or too much money going out. Big trouble occurs when both are happening simultaneously.
To help reduce the amount of money leaving your business, take a closer look at these reasons why a business overspends.
Lack of planning
Without a plan for the year, a business is vulnerable to the whims of the business owner and staff.
A business plan is essential to organize your team, your resources and your strategies. A plan is especially important if the business must achieve certain goals on a very limited budget. It can help your business to map out activities across marketing, finance, human resources operations and administration – and set a budget for each. Without such controls, owners and staff may make costly decisions that do not advance business objectives.
Take the time each year to update your business plan.
Unlike big companies, few small businesses have sufficient reporting tools or experts to help analyze marketing data. Decisions made without the insight of analytics can be costly, shot-in-the-dark mistakes.
For example, analytics can identify which marketing activities are contributing to revenue. Explore cloud-based solutions or consider hiring a part-time consultant to help you collect and interpret the results of your online and offline marketing activities.
Wrong fit vendors
Companies often hire the wrong vendor for a job, and it costs them money when that vendor proves to be inexperienced, inefficient or even incompetent.
It usually happens when a busy business manager turns to an existing vendor and asks, “Can you do that for us?” The vendor is all too happy to offer the additional service – even while they may not be qualified to do so.
A supplier working with you in one area of the business (e.g. information technology) does not mean that they represent the best service choice for other areas (e.g. printing). Take the time to investigate industry leaders for whatever your business is looking to buy and ask them to submit a quote.
Paying vendors too much
When’s the last time you conducted a vendor review? An incumbent vendor may be charging you more than competitive market rates for products, materials or services. For example, very few small businesses collect commercial insurance quotes from multiple brokers or agents.
Vendor management goes beyond a good relationship: it’s about constantly comparing the vendor’s offering to ensure your business is receiving the best value.
Missing financial management advice
The talents that brought you into business may not include finance. And that’s okay. But it is important to work with someone who does understand financial management – specifically:
• Review and interpretation of financial statements to assess year-over-year performance.
• Tax strategies to minimize tax liability.
• Reinvestment strategies – to identify which parts of your business should receive more funding.
• Raising capital; advising on options for debt or equity financing.
And, a general lack of financial controls can contribute to out-of-control spending. Every small business should set controls for things like spending limits, cheque authorizations and vendor selection.
Many small businesses hire a part-time Chief Financial Officer (CFO) to supply these and other key financial management services. There are many firms offering part-time CFOs on a 12-month or 18-month engagement basis, to support the business until it is large enough to hire a full-time and in-house person.
Have you successfully battled overspending? Please share your experience in the comments below.