Small businesses watch cash flow closely…and with good reason. When receivables come in more slowly than payables go out, managing cash is essential for payroll, taxes, and unforeseen circumstances. ‘No surprises’ is the best outcome when forecasting cash flow. Understanding hidden costs and wasteful spending will help maximize profitability and cash flow.
1. Employee turnover – When employees leave, a wealth of knowledge goes out the door. It’s natural to see a loss of productivity while looking for a replacement. Then, with a new hire, there is an investment of time while the employee comes up to speed. The loss of productivity and training new employees can increase expenses. Employee retention programs can emphasize what’s important to employees and create a company culture that retains talent. And happy employees generally work harder and more efficiently which increases profitability.
2. Permits, licenses, memberships – Businesses that have to pay annual fees need to remember to budget for permits and licenses. And membership dues may be required to do business with some clients or may mark the company as a contributor to the community, or provide exposure and a forum for networking. But too often businesses pay for permits they no longer need, business licenses in jurisdictions where they may not do business or memberships in groups that don’t generate business leads or provide educational value.
3. Property and other local taxes – Businesses must also remember to budget for property and other non-IRS / employee-type taxes. Generally, the business will receive an “invoice” in the fourth quarter, with expected payment within the first 2-3 months of the first quarter of the following year. The hidden expense portion comes in when businesses don’t maintain an up to date property listing and continue paying taxes on assets they no longer have. We saw a client still paying property tax on a phone system they had trashed THREE years ago. Sure, the taxes were minimal but it was still listed on the assessment and they were getting charged.
4. Office equipment: maintenance, repairs, upgrades – Computers probably need to be replaced every few years to keep up with technology. Make a budget plan for upgrading computers or other equipment to keep the cost from eating into profitability. The hidden expense comes from lost productivity and overspending on IT services to keep the old dinosaur running when putting it out to pasture and buying a new unit would be the more cost effective option.
5. Insurance – Every business needs insurance. Types of insurance vary, but most need employer liability, public liability, negligence, and property insurance. Depending on the business, clients may require certain insurance levels. It’s important that the exposures used to calculate the premium are accurate. One example is a client reporting an astronomical amount of equipment because they were very good at notifying the agent of additions to their fleet but very bad about culling the assets that were disposed of.
Also, it’s important to regularly bid out the insurance coverage. A good broker will shop around to get the best discounts possible.
6. Loss of inventory (shrinkage) – Inventory that isn’t sold at market rates is a lost opportunity for the company. Damage, both intentional and accidental, and employee theft is also, unfortunately, common. Inventory gets damaged or administrative errors result in waste. The solution to minimize shrinkage depends on the level of problem. Some companies may favor low-tech preventative measures such as educating employees about the cost of shrinkage, segregating duties to limit opportunity, and reducing temptation by storing valuable items in secure areas. Other companies may require surveillance cameras or inventory management systems. Insurance companies and local industry associations are helpful resources for evaluating a situation and establishing the proper policies and controls.\
7. Inefficient use of supplies – Although it may sound petty to talk about things like pens and notepads, the point is to not waste resources. Keeping supplies in a locked cabinet is a first step in managing office supply orders. One client discovered two cases of legal pads in a cabinet. Even at one pad per employee, per month, they still had a two-year supply! A simple periodic (e.g., monthly) inventory count can be helpful. Comparing purchases over time provides a picture of usage and shrinkage. In addition, make a move toward a paperless office. Print documents only when necessary, send invoices and pay bills electronically, and scan documents for electronic storage instead of filling up file cabinets.
8. Time – Take a look at the division of work responsibilities and look for ways to be more efficient. Accounts payable and receivable are a perfect place to start. Many new accounting systems make it easier than ever to input payables, approve for payment, and pay bills electronically. See When is it Time for a New Accounting System? for more information.
9. Professional services– Professional areas are a perfect source of wasteful spending if these services are not adding value or being managed efficiently. Don’t fall into the trap of “same as last year” or “we’ve always used ___ for this”. Carefully analyze what each provider is doing to ensure they are still a fit for the business or if there is an opportunity to improve. To be certain, the lowest cost provider is not always the best choice; rather sometimes improvements are made by spending more on better services or cutting the unused ones.
Hidden costs don’t need to be a surprise. Be prepared and minimize the impact of hidden costs on cash management and profitability. For more information about budgeting, please see Budgeting Essentials in 8 Steps.