Creating a budget is an essential step towards business success. Many businesses are encouraged to make budgets for efficient capital allocation. However, creating a budget is much more than just creating a list. Before you can produce an effective budget, you require to collect and analyze sufficient data concerning your business’ consumption needs.
Collecting and analyzing this data involves tracking day to day expenses for weeks or months. Tracking business spending offers numerous benefits including:
Producing a meaningful budget
Understanding where you spend your money provides the insight necessary to create meaningful budgets. Tracking expenses enables one to categorize expenses according to time, price, and/or method of payment. Some expenses may vary from seasonally, monthly, or weekly. Rent or mortgage payments are expected to fluctuate less widely than gas prices.
Documenting these expenses and the reasons for fluctuation provide information that is important for the long term success of the business. You can predict more accurately, what the business will consume over a year when you know what to expect in regards to expenses and their variations throughout the year.
Better budgets are easier to stick to as they are more aligned with the business’ consumption patterns. Longer tracking enables better and better budgeting.
Fights mindless spending
As you track business expenses, it becomes harder to spend on any unnecessary stuff. You’ll be able to notice some unusual consumption patterns. Your business might be paying too much for a product or service, compared to industry averages. This will prompt you to reconsider the expenses the business incurs. The problem areas can be identified quickly when business expenses are documented. Identifying these problems is only half the battle.
Motivation to cut back
After documenting expenses for weeks or even months, you sit down and analyze the data. You realize that the business has the opportunity to cut costs but trimming some areas. The business might require extra money for debt repayments or research.
Trimming business expenses may not be as drastic as you think. It can be as simple as switching off the A/C when no one is at the office to reduce your electricity bill, or in the case of a restaurant, noting how much food is wasted and adjusting your orders accordingly. Ensure you track your expenses when you cut back to analyze the impact of any cutbacks.
Catch expenses you forgot about
As you go about your business day you might encounter rare expenses which you might forget about unless the business has sufficient internal controls. However, these expenses still have an impact on your profitability.
Adding up the receipts might not cut it, go over bank account records and ensure that everything is captured. You might find a few charges you didn’t know existed, such as magazine subscriptions from a few years back. Some “free” services are only free for a few months, and without canceling subscriptions your business continues to incur charges.
Tracking expenses enable businesses to cancel any unnecessary subscriptions so as to divert the finances towards more productive avenues.
Simplifying
Tracking business spending enables the adoption of a more simplified consumption pattern for the business. If a business consumes a fixed amount of materials each year but acquires these materials four times a year, it may be more economical to make purchases twice yearly.
If the business consumes similar products, you might consider using one supplier instead of three. These insights can only be gained by first tracking and documenting business expenses. Simpler consumption patterns may result in significant cost savings for businesses.
It may seem hard to track business expenses but it is only a challenge at the beginning. The more you track expenses, the more you understand the consumption patterns of the business. This promotes better decision making when allocating capital for expenditure.
