Do you ever feel like money is constantly flowing out of your business? Every time you turn around, there is another expense or bill to be paid. Not all business expenses are created equal. Today we will break down the different types of business spending in most businesses. There are different ways to view and review all of these to optimize your profit.
Personal perks are not unique to small businesses. All businesses offer benefits to their employees. However, those benefits generally have to be offered equally to all employees. This means small business owners can offer themselves “benefits” that they might not see in corporate America because they don’t have hundreds of employees receiving the same benefit.
Is your business paying for things you would be paying for out-of-pocket even if you didn’t have a business? These could be things such as:
- Cell Phone
- Meal Delivery (prepared lunches every day while you work through lunch)
While you should not break any rules/laws when passing expenses through your business, certain things can be classified as business expenses because of their use and relation to your business. When looking at the personal perks funded by your business, I tell clients to consider these numbers more like owners’ pay or profit. This is why the IRS keeps such a close eye on deductions for sole proprietors and S-Corps. If your business pays $15,000 in expenses that you would have paid even if you weren’t in business, that is a perk!
The number one thing to remember here is that these, and the costs discussed below, ARE expenses. You and your business only benefit from these expenses if they are tax-deductible…and the benefit is only equal to the tax associated with that amount. I know that many business owners think it is in their best interest to pay more for an expense because it reduces their taxes. This is not true. The average tax rate for most small business owners is around 30%. Saving $30 in taxes on a $100 expense is not worth losing $70 if that expense is overpriced, unnecessary, or lacks value to the business or business owner. Don’t throw away $70 to save $30!
Necessary Business Spending
Necessary business spending includes the expenses that keep the business running. These are the items required to operate legally in your county/city/state/country. They also include the costs that keep the lights on and allow you to do your work.
- Business Insurance
- Legal Structure Fees (business license)
- Continuing Education (if required for your industry)
- Professional Services (bookkeeper, legal counsel, etc.)
- Utilities (internet, electricity, water/sewer)
- Rent/Mortgage (If you have a physical location)
These expenses will not result in a monetary return, but they are necessary to do business legally. Just because they’re required expenses doesn’t mean you should just keep paying the same price you’ve always paid. You can still reduce these expenses to maximize your profit. Sometimes, you can shop around and get a better rate. This is especially true of utilities and insurance costs. When was the last time you looked into a different plan or checked the going rate for internet providers in your area? When it is time to renew, see what else is available, and you may be able to save a little money! If you can’t find a better price, think outside the box. Could you achieve the same goal differently? Many service providers can work from almost anywhere. They keep an office space for meetings (or, if you’re like me, to have peace and quiet when the kids are home), but they don’t use it every day. Maybe your office space is bigger than you need right now. Could you split space or days with another business owner? I know a t-shirt printing business owner that noticed a unique space in the back of her building that isn’t useful for her but IS useful for her hairstylist friend. She now shares that space and cost with her friend.
Unnecessary Business Spending
Once you’ve identified the personal perks and necessary business spending, you’re left with two types of costs: Unnecessary Business Spending or Investments. I recommend looking for unnecessary business spending first. Every business has unnecessary expenses. EVERY. BUSINESS. These may be free trials that turned into monthly subscriptions. Or online tools that we do not use enough to justify the cost. Business owners are inundated with offers. Some are great and turn into necessary expenses, but often they are not worth the price.
This category has the quickest and easiest wins! It takes no time to cancel a subscription or service. Many businesses are unaware of these monthly costs. You can create a quick influx of cash into the business if you identify and cancel everything you do not need. Take a little time to go over your bank statements and identify the recurring expenses you can cancel.
Last but not least is an investment in the business. This is probably the most important expense a business can have. If the expense is not a personal benefit, it’s not required, and it’s not already eliminated as unnecessary, it should be an investment. These expenditures are very specific to the growth and success of the business. Expenses are investments if they meet the following criteria:
- They are trackable
- There is a direct result that is expected (measurable ROI)
- There is an estimated cost (not an ongoing blank check)
A great example of an investment expense is a marketing campaign. A well-planned marketing campaign will outline the activities, costs, and, most importantly, the ROI estimation. This allows you to review the investment cost versus the money it brought into the business and determine if this is an investment you will make in the future.
Another example of an investment in networking organizations. Sometimes business investments will cost money and time, so you should include the cost of your time when estimating the total investment. Let’s break this down!
Networking group fee: $500/year
Time investment: 4 hours per week
Business Owner Hourly Rate: $100
Time Investment: $400/week & $20,800/year
Total Investment: $21,300/year
In this example, to make the networking group with the investment, you should be receiving at least $21,300/year from the relationships you are developing. One BIG asterisk around networking groups is that it takes time to see a return on your investment. Relationships take time to grow, and in this setting, they are reciprocal. So, track where your referrals are coming from and the amount of money into the business from these relationships. Since networking takes time to grow, pay attention to the trajectory of your referral network. Is it growing year over year? What are the quality of clients coming from your referral partners? Ask these questions to decide if your networking is worth the investment.
How to Determine What to Invest In and What to Stop Investing In
Not every investment will be a good one. As a business owner, you will be approached with a million investment opportunities. This is especially true with offers that will promise a financial return. Our advice is to take all of these offers with a massive grain of salt. While there may be some legitimate opportunities, avoid the urge to try them all. Any investment should have a precise measurement of success and a straightforward process that can be replicated in the future if it is a good investment.
If your measurement shows success, great! That is an investment that should be repeated in the future! If you find yourself looking at an investment that brought in less than what you spent, that is probably not with your time and money in the future (unless you change something about it). Constantly review your numbers! This is how you avoid wasteful investments that do not yield any financial results for your business.
At 4 Corners CFO, we love helping our clients identify their expenses and investments and figure out how to reduce unnecessary costs and make investments that bring more profit into the business. Book your complimentary discovery call today, and let’s get started!