How Efficient Are Your Business Expenses? - dummies

How Efficient Are Your Business Expenses?

By Marina Martin

It’s easy for expenses to creep out of control over time, especially those that are outside your core areas of expertise (for example, a grocery store may not be on top of the latest computing technologies and prices). Asking yourself the following questions can help track down some runaway costs:

  • When was the last time you reviewed your electric bill? The larger your physical space and infrastructure, the more opportunities you have to drastically lower this bill. In fact, many private companies have released tools and even games to help residential and commercial customers lower their electric bills.

    Ask your utility if it offers Green Button, a way to download your energy usage data and even connect it with some of the aforementioned tools so building managers can track and try to reduce usage over time.

    There are also devices you can install to turn off lights automatically on weekends, when people leave the room, or even remotely via your mobile phone.

    Don’t let efforts to curb energy usage unintentionally encourage employees to leave the office early. If all the lights go out at 6 p.m., it’s hard to stay late to meet a deadline or work flexible hours.

    You can also take an analog approach here: posting small signs over light switches and incorporating “turn off the lights” in end-of-day checklists go a long way toward changing behavior.

  • When was the last time you reviewed your other overhead expenses? It’s easy to focus on expenses directly related to the product or service you create, and to just assume that the foundational costs — phone bills, Internet connections, printing/copying costs — are efficient as-is. Making a company policy to review these on an annual basis can keep these expenses from reaching runaway peaks.

    The Digital Government Strategy for the federal government of the United States recommends a “Bring Your Own Device” policy, where employees are partially reimbursed for using their existing personal computers and mobile phones for work, citing lowered costs and increased productivity.

  • What’s your expense approval process? If the answer is “we don’t have one,” it may be time to create a process — even if it’s only one or two bullet points. Typically, an approval process dictates a certain price point, under which employees or departments can make purchasing decisions without approval, and over which approval is required.

    Every approval process should require a market price comparison. Although cheaper is not always (or often) better, it never hurts to know where your chosen purchase falls on the pricing ladder. Far too often, business people pay way too much for a service solely because they weren’t aware of the cost of other options.

    Never make it a policy to purchase the lowest-cost option. In fact, a few companies institute a policy that explicitly rejects the lowest-cost choice.

  • Do you understand the Total Cost of Ownership for your equipment? The actual cost of most equipment far exceeds its sticker price when you start to factor in future required costs. The sum total of the equipment’s costs for the entire time you own it is its Total Cost of Ownership (TCO).

    Consider buying a printer. The cost of the printer does not end when you walk away with the printer itself; there are toner cartridges, paper, cables, maintenance contracts, and potentially additional software to purchase as well. Before buying a printer, you should do some back-of-the-napkin math to determine if paying a little more up front ultimately leads to a lower cost overall (because, for example, one manufacturer sells significantly cheaper toner cartridges).

  • How do you recognize which expenses are tax-deductible? This is a particular issue for small businesses where you report your business expenses as deductions on your personal tax return. Some companies with dedicated accounting departments scramble to collect receipts in boxes when tax time rolls around, and this is a completely unnecessary cause of stress and waste of time.

    This gets even more complicated when you depreciate assets (which means you spread the deduction for the cost of expensive equipment over multiple years).

  • How are you processing payments? A sneaky hidden expense is the expense of processing customer payments. This includes payroll expenses for the people handling incoming payments and collection agency costs, as well as actual fees for bank accounts, merchant accounts, and credit card terminals. Knocking even 0.1 percent off your credit card processing rates can put serious money back in your organization’s pocket.

  • Who is in charge of keeping expenses in check? Researching competitive pricing is a task that is rarely “owned” by one person in the company. Decision-makers may assume that accounting handles it, or may simply not think about price when comparing other features. If there’s no one you can designate in this role, then you at least need to take steps to include cost-checking measures in your project-planning templates.

    A bigger problem here is as a company grows, two or more departments may make the same purchase independently, when they could have collaborated to lower or eliminate the cost of the additional purchases. It’s one thing to add extra seats to one software contract, and another to purchase two different systems that do the same thing.

When comparing costs and potentially switching to different equipment, software platforms, or even health insurance providers, don’t forget to consider the cost of switching. For example, if you change health insurance providers every year, you may put employees with chronic illnesses at risk of being rejected or receiving lower benefits.

This change may also cause all your employees to have to switch primary care providers, breeding significant resentment. This is not to say you can never switch providers — in fact, if your employees have lots of negative feedback, it may be wise to switch! — but you need to keep the big picture beyond mere dollars and cents in mind.