Once you have a clear concept of how much money it takes to run your business day to day, and even if you’ve advanced well into the operational life of your company, you can find ways to chip away at the costs of doing business. We encourage you to micromanage the money that flows out of your business in the earliest stages especially – not only does it improve the margins of your revenue, but it increases your degree of knowledge of every aspect of your business. As you grow, perhaps adding others to the team, you’ll be a smarter manager because of the familiarity you gained in the early days with these kinds of details and the best practices to handle them.
So what kinds of expenses are up for review? Any and all of them. Depending on what kind of business you’re creating, you’ll face costs for vendors, utilities, communications, supplies and many other things. Here we provide some perspective on how to look at your spending, and maybe cut expenses to make your cost-to-revenue margins a little fatter.
Never take a loss on items you’re shipping to customers. It’s important to include a premium on shipping because there’s also the packing and administrative aspects that have to be folded in. Having said that, don’t ever let a shipping policy get in the way of customer experience.
Using credit cards is something we all do. But the key is to pay down balances as quick as you can, ideally, paying each monthly balance completely to optimize your credit rating. And the impact goes beyond your credit rating – you can quickly rack up additional costs as interest at rates upwards of 18% accumulate. If you anticipate having long-standing outstanding amounts due, consider an alternative such as using cash that you can generate from home-equity or personal loans that come at much lower interest rates.
Time Your Spending
A cash-flow forecast can also help you with the timing of your payments. After figuring how much money is coming in at particular times in the month, it may prove beneficial to pay vendors at different times. For instance, it might be better to wait until closer to a due date to pay some bills, as opposed to spending that money upon receipt. But never pay late and don’t wait too long.
Pay on Performance
One of the smartest cost management strategies relating to the people you hire or contract with is to pay them based on their performance. Instead of paying a flat fee or an hourly rate, figure out the performance objectives with them and figure out a payment scheme that compensates them based on what they deliver, not just the hours they spend. Salespeople have been commissioned based for time immemorial – apply commission-based compensation to other relationships. This way you’re only incurring costs in a way that’s proportionate to how well your business is performing or the vendors to your business are performing.
Buying Versus Renting
If your business grows and you need to move out of your home office, why pay rent to someone else if it’s not necessary? Real estate is not a bad investment for your business if you can afford it, even if your primary business isn’t real estate. Buying real estate will be a challenge, but it could offer large dividends over the long term.
The first thing you need to do in your search is find a good location for your office. It won’t hurt to have some insight as to what neighborhoods in your region are on the upswing and will appreciate in value.
When you find the right property, depending on how it’s laid out, it might be worth your while to find other tenants to pay you rent. This will require that you handle the building’s management and upkeep, but these tenants will bring in revenue. To accomplish this, you’ll need to form an LLC (limited liability company) to own the building, charge your primary business market rent and collect rent from co-tenants.
This will build equity in the real estate that could become a very attractive and valuable asset to you personally. And look at it this way, you could eventually also use the equity that’s grown in the building as leverage to borrow money for you business.
While buying real estate can help you collect money, keeping you office at home can help you save funds. Many self-employed professions can get by running offices out of their home, from attorneys to accountants to insurance agents. And one trick of the trade is that rates charged for residential use of phone service and internet service are consistently lower than rates for charged to businesses. Take advantage of that.
Home offices could also potentially provide you with tax write-offs that you wouldn’t receive in leasing an office. You have to pay your mortgage regardless of where your office is, so why not save money and have it in your home if you can?