The control of expenses in an SME is essential at any stage of the business in which we find ourselves. Properly managing them enables liquidity to be improved and, with this, to be able to meet both short-term financial commitments and the allocation to reserves with a view to making future investments to ensure growth. Neither the expenses nor, in general, the accounting, are a fixed and invariable picture, but rather fluctuate from time to time, by virtue of both the decisions made within the company and the economic and market situation that occurs.

Fixed expenses and variable expenses

Not all expenses in an organization have the same character. It can be differentiated according to different variables, although perhaps the two most common are based on time (short-term or long-term) or its periodic quantification. In the first case, this distinction is crucial for the management of working capital, which is the subject of another article. Focusing on the very nature of the expenses, those that are fixed do not vary according to the increases or decreases in the company’s productivity, but are recurrent. The most common examples of fixed expenses are employee payroll and the rental of premises or machinery used to carry out the activity.

At the other extreme are variable expenses, which do fluctuate proportionally as production evolves. In other words, for a factory that needs water to create certain goods, as it produces more it will normally require more water, so more will be consumed. Raw materials or electricity are two other examples of variable expenses. In any case, this type of input also has a recurring component, since a minimum payment must always be paid to maintain the supply contract, regardless of its use.

Assess costs and expenses

Before proceeding to the effective control of expenses, it is also appropriate to differentiate in a company between what is a cost and what is an expense. Usually, both terms are used for the same thing, although they are accounting different. For example, a cost is what has to be paid to acquire goods linked to the company’s main production activity, that is, the cost is closely linked to the product itself. As for expenses, it consists of the disbursement to be made to be able to enjoy other services that are necessary for the company to carry out its activity but not necessarily for its ultimate purpose. For example, in an assembly line, everything related to logistics and administrative services.

As a general rule, the costs have a direct impact on the final retail price of a product, having an effect on the income and the net profit obtained in the market. In other words, if what is intended is to effectively control expenses, company managers have to look holistically at the entire structure of the organization and not exclusively at the production process.

A cost control strategy

The lack of control and an effective cost control strategy in an SME is the main reason why many of them end up ceasing their activities. By controlling expenses, a company can analyze its results, find areas for improvement and, with all this information, make decisions to ensure that sales and profits are higher in the next year. In addition, a planning of expenses allows establishing comparisons with previous years and, even, with the rest of the competitors, by virtue of the information that they provide to the market.

For cost management to be effective, it must be possible to monitor, record and recognize all economic operations carried out within the company, which implies having tools to exercise efficient financial traceability.

There are three fundamental tools for controlling the expenses of a company:

  • Through spreadsheets, which have the problem that, if the business grows, it will be increasingly difficult to keep real control of expenses up to date.
  • Through computer programs, which, even so, require human interaction, especially with the CFO or the company’s financial controller .
  • With ERP platforms, which are advanced comprehensive business management solutions that allow you to control all expenses in a fairly agile way and potentially maximize the benefits of an entity.

Parallel to ERPs, in recent years apps have appeared on the market that allow a company’s accounting to be carried out digitally and automatically, favoring dialogue in real time and from anywhere between the accounting manager and the rest of the workers and thus carry out an effective control of any expense that occurs.

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Keerthana is the Managing Director at digitalkirk.com. After many years of making it and breaking it in the freelance world, she now mentors new writers who want to take their careers to the next level.

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