For small business owners, every penny counts, as they typically have less disposable cash compared to larger companies. In the bid to save on operating expenses, some small businesses do things that eventually boomerang and damage their brand reputation.
Being financially prudent as a small business owner is not about being cheap. Instead, it is about being smart with resources to build a sustainable business that consistently delivers value. While being prudent helps cut operating expenses, it should not prevent you from developing a strong brand reputation built on trust, quality, and consistency.
Why Small Businesses Need to Be Financially Prudent
Businesses need enough cash on hand to ensure financial stability, cover unexpected expenses, and finance growth initiatives. The fund acts as a buffer against financial shocks, enabling them to meet obligations and capitalize on opportunities.
Meanwhile, as a business owner, avoid the mistake of mixing your personal wealth with that of your business. This can be catastrophic as businesses are ventures with lots of surprises. A report by the United States Consumer Financial Protection Bureau revealed that despite having a higher income, savings, and household wealth, small business owners are more likely than non-owners to experience an unexpected expense. They are also more likely to experience different types of credit constraints.
When a small business owner effectively manages their finance, they will have enough funds for unexpected expenses and no need to seek urgent credit. This can increase the odds of success and sustainability of the business. Aside from this, any money that gets wasted in your business invariably reduces your profits.
Whether you are a first-time business owner or a serial entrepreneur, these ideas are all about becoming more frugal and making your money work harder for you.
Rethink Your Office Space
For many businesses, a physical office space can boost customer trust. While renting an office space is nice, it can harm your business if it is more expensive than you can afford. Even when you can, saving costs by renting a virtual office space instead can help provide more funds that can be invested in new opportunities and cater to unexpected financial needs.
Despite being cost-saving, a virtual office combines the convenience of working from your comfort zone with the professionalism of your own workplace. It also offers services and resources that might be too expensive for you to afford if you had rented a physical office space.
Monitor and Manage Employee Spending
Many small business owners think that because their spending is so small, they do not need to manage it. This is not true; in fact, it is a habit that could destroy a thriving business. Establish a robust bookkeeping system to monitor payroll and other employee-related expenses. This is essential for understanding your profitability and tax obligations. Develop a realistic budget for your business operations and projected employee expenses.
Establish clear policies, set spending limits, and track expenses regularly. Activating pre-set limits and deploying a monitoring system for your monthly spending reports can help you save money and avoid costly mistakes. Design an expense management system that clearly states the types of expenses that are allowed and those that are not. Set a maximum budget for each employee expense category, such as business trips, exhibition bills, and the purchase of equipment and supplies. Also, watch out for expense report fraud.
Avoid Being Short-Staffed, but Staff Slowly
The biggest operating cost of most businesses is the payroll. This is no surprise as your company’s performance is as good as the collective productivity of your staff. Staffing issues can significantly hinder operations and damage your brand’s reputation. A short-staffed company will invariably have its employees stressed from working too much than usual and could make them underperform. Many might even quit, and you will probably be paying excessive amounts of overtime.
Even though staff are an integral part of your business, a poor hiring choice can do more harm than good. According to Gallup, a poor hiring decision can cost your business between one-half to two times a person’s salary if you make a bad hiring decision. The cost could likely be higher for managerial positions.
Understanding your business needs can help with finding employees who are a cultural fit. It could also help in identifying the number of staff needed and avoid both understaffing and overstaffing. Do not be tempted to overstaff in anticipation of a peak period. You should consider hiring contract staff or seasonal employees instead.
Before hiring new employees, deploy a performance management system to ensure your present workforce is optimally performing. Sometimes, you only need to improve their working condition to boost their productivity instead of hiring new employees.
Leverage Legal Means to Reduce Your Tax Bill
While it is a good thing for every business to contribute its fair share, paying more than necessary to the government can deprive you of extra cash to reinvest in your business or take advantage of opportunities. Get a tax professional who can help identify tax deductions. This strategy is called tax avoidance.
Tax avoidance is legal, but tax evasion is criminal. Pay your taxes as when due, but only do so after legally exploring ways to reduce them to a minimum. Below are some tax avoidance tips you can incorporate into your financial prudence strategy:
- Set up a 401(k) plan
- Claim the qualified business income deduction
- Take account of depreciation expenses
- Report financing costs for your business, such as fees and interest on loans and credit cards
- Research retirement accounts and the maximum amount you can put in them
- Set aside money for a child’s tuition
- Donate to charities
- Consider green energy tax credits (if applicable in your business area).
Sharpen Your Negotiation Skills
Every aspect of a business involves negotiation, whether you realize it or not. Improving your negotiation skills can help you reduce your overall cost of production and improve your relationship with your employees and other industry players.
If your business requires patronizing certain vendors or services, ask for their discount offers and terms. Consider negotiating a longer-term commitment for favorable pricing. Many vendors or service providers will be willing to offer a discount if you propose paying upfront.
For small businesses dealing with suppliers, research and compare prices offered by different suppliers. Ask your present supplier if they can match or offer a better price and terms offered by their competitors.
