The Bottom Line on Expense Management, aka the Swiss army knife of financial management
August …. a great time for thinking about expense management. Some businesses are seasonal and maybe a bit slow at this time and most businesses have a smaller staff at this time due to vacations, so this at this time a business owner and their financial partner can consult and spend some quality time together adjusting to the direction of the company.
After all, seven months of data is available for analysis which leaves five months of spending to reconsider. Changes, both in increase and cutbacks, can still have the desired impact on the year end numbers. And, while expenses are being analyzed for the current year thought can be given to a preliminary look at the following year. I believe in a 12 month rolling P&L for an accurate look at the potential of a company, but that’s a discussion and a blog for another day.
So, here are a few thoughts for August as it relates to expense management……
Review the first 7 months and adjust – Budgets after all ARE etched in stone once agreed to, but projections are dynamic. If you’ve budgeted spending $20,000 on your web site and a new product launch promises to add an 8% increase in the bottom line, there’s nothing wrong with spending an extra $5,000 on the launch (providing you’ve done careful analysis on the new product) to support the plan. The budget remains $20k but the projection is now $25k. On to the next line item, the next, lather, rinse and repeat. Keep an eye on the budget but benchmark to the projection.
Was the budget correctly prepared for the current year? – Taking the expected expenditure and dividing by 12 to get a monthly budget might work really well for rent where the monthly expense is constant but won’t work well for planning for membership fees or trade show attendance when the expense only hits in one month. Neither will taking last year’s spending and adding an arbitrary percentage like 8% to that amount to come up with this year’s spending.
Review the procedures for expense allocation and adjust – Over the past 7 months is there significant unplannedover spending? How did that happen and how can things be changed to put more collaboration into the decision? Did the method used for cost allocation like adding percentage points to last year’s number work? If not change the procedure. Are you using purchase orders and a approval process to hold employees accountable for spending? How much input do you require from line supervisors when thinking about expenses? Is it an honest discussion or does it turn into a trip to a used car lot? What kind of reporting do you use to keep management and line employees apprised of the results from their area of responsibility? Showing someone a report letting them know they’re on a trend to overspend the budget by 10% is essential, but if the report is 4 months old it’s not really going to help.