Reducing costs and increasing revenue is the only way to keep your business growing, but many businesses are in the habit of overspending for basic business needs. They pay far more for the services they need than they should, neglecting their original budget or building misconceptions and inaccurate estimates into their budgets in the first place.
Identifying and reducing these areas of excessive spending are vital steps if you want your business to be financially healthy.
Where Businesses Overspend
These are some of the most common areas:
1 Labor. Employees are the force that will help your business grow, but they're also ridiculously expensive. Each employee you hire will cost you not just salary, but benefits, taxes, and extra outlays along the way. Unfortunately, most businesses end up hiring prematurely or they hire too many people, ultimately resulting in enormous expenses that don't provide an equal return to the business.
2. Internet and telecom. Phone and internet services are vital for any business, since communication and accessibility are critical to almost any type of business. However, most businesses end up overspending on telecom. They end up with bulky contracts, hidden fees, and far more services than they truly need, resulting in hundreds, or even thousands of dollars per month in unnecessary spending.
3. Data storage and management. Most modern businesses need some way to securely store and manage data, whether it's information on customers or industry developments. However, it's easy to overpay for these services; if you're getting a service with too many features, or one that doesn't suit your business's needs, you'll end up paying for things you never use, or paying too much for basic services.
4. Software. There are thousands of companies with millions of software products targeted at business owners. These software products can help your business perform new functions, operate more efficiently, and increase profitability--but each new product you add to your suite of products is going to cost you a monthly subscription fee. If you aren't careful, you'll end up with far too many products that aren't helping your business, costing you thousands of dollars per month.
5. Marketing and advertising. Marketing and advertising can be expensive, but it's also an important investment that shouldn't be cut. Your goal should be spending money on marketing and advertising in the most efficient way, resulting in the least possible amount of waste. To do this, you'll need a solid high-level marketing strategy in place, a reliable marketing and advertising partner, and the ability to focus your spending and attention on the tactics most likely to pay off.
6. Office expenses. Too many businesses are still paying an egregious amount of money for a traditional office space; they have a fancy office building downtown that they're leasing for tens of thousands of dollars per month, and are paying for additional products and services to keep the office functional. Do you really need it? Can you work from home instead, or downsize to a more modest office in a less expensive part of the city?
7. Technology. It's tempting to keep your business stocked with the latest and greatest devices our technological engineering minds have to offer. But if you're always buying new devices, you're probably overspending on technology. In many cases, used devices and year-old technology can save you a ton of money, while providing similar functionality.
Why Do Businesses Overspend?
If you want to correct your overspending in these categories, you'll need to narrow down the reason for your overspending. These are the most common culprits:
- Lack of initial planning. Some businesses don't take the time to plan a budget from the outset. They don't have an idea of what each category should be costing them, so they're likely to agree to any cost quoted by a vendor.
- Bad vendor selection. Most vendors are scrupulous, offering fair prices and good services, but others are questionable. Choosing an unreliable, overly expensive, or outright manipulative vendor can hurt you.
- Failing to negotiate. Almost everything in business is negotiable--even contracts for what seem like standard service packages. Spend more time negotiating with your vendors, employees, and other business partners to get a better deal.
- No analytics or auditing. Many businesses continue to overspend because they have no system that allows them to notice or address instances of overspending. You need to have some kind of auditing and/or analytics strategy in place.
Where is your business overspending? With your critical attention and a willingness to adapt, you'll have a clear path to improving your budget. Start with a thorough audit and analysis of your business spending, and highlight the areas that can feasibly be improved.