I know it is exciting when you first start your business, or when things are going well, you just want to go out and buy new swanky stuff, upgrade and make larger purchases. You want to go out lease an office and buy new modern furniture, upgrade to the latest software, buy a latest smart phone, lease a business car, fill your shelves with the cutest office stationery etc etc.
But remember the formula for business is: Profit = Revenue – Expenses. You don’t have to be a genius to realise to be profitable in business you need to spend less than you what you earn.
It’s important, for those new to business and those who have been in business a long time, that you do not waste money on things you simply do not need. One of the main reasons a business fails is lack of cash flow and working capital. Learn to be frugal in your business and spend your money wisely to give your business the best chance of staying around for the long-term.
Increase your chance of business success by being frugal
Being frugal means to be very wise with your money. Being frugal doesn’t necessarily mean always buying the cheapest. There are other factors that will come into your purchasing decisions such as quality, reliability and service. Your business priorities will help you weigh up the importance of these factors.
The first step to becoming frugal in your business is to know exactly where and what you are spending your money on (it is common to overlook your smaller expenses but they do add up quickly). Next you need to identify any areas where you can reduce your costs and therefore increase your overall business profit.
Step 1: Make a list of all your expenses and the dollar amount
Include your one-off expenses, regular fixed expenses and your variable costs, such as:
- Registrations, licences and permits
- Fit-out of premises
- Utility fees (phone, electricity, gas)
- Purchase of stock
- Raw materials and parts
- Tools and equipment
- Website (design, hosting fees, domain name registration)
- Internet access
- Advertising and marketing
- Printing and stationery
Step 2: Review your expenses
Identify where you can reduce some of your business expenses, such as:
- Lease computers and office equipment instead of purchasing
- Work from home instead of renting office space
- Use the free/low cost version of software rather than ‘pro’ version
- Use technology e.g. web/teleconferences, online payment services
- Outsource rather than hire permanent staff
- Do it yourself (DIY) marketing and PR
Some more frugal tips:
- Track your expenses. If you don’t know what you are spending your money on you won’t know where you can cut back. Also, when you track what you are spending you automatically become more mindful about what you are spending money on.
- Do your research before making a purchasing decision e.g. Confirm your exact business requirements to ensure it meets your needs, look through customer reviews, take up any offers for a trail period.
- Manage your inventory closely. The more stock you have on hand the more working capital will be tied up in it. Use stock control to help make sure your working capital is not being tied up unnecessarily.
Review your business finances regularly. You should have a clear picture of your business finances at all times, you need to know what is coming in and what is going out and to ensure your expenses are not more than your revenue.