6 Areas Where Businesses Frequently Overspend and How to Address Them
Any smart procurement executive knows that you need to spend money to make it. You might find people who believe you can start and operate your business without any significant investments. But that approach can lead to challenges of its own.
The bottom line is this. If you own, manage, or operate a business, you’ll always have expenses to handle. With that said, many companies spend significantly more than they need to on recurring costs. These spending patterns often fall into the same key areas. While it’s true that you’ll need to spend money during your company’s development phase, having unnecessary expenses chipping away at your bottom lines is undesirable. Thankfully, this is avoidable.
These are the six areas businesses most frequently overspend, and how you can address this expenditure.
1. Physical Office Space
Any business with a physical presence needs office space. But the costs of renting offices can be significant, especially if you are in a central metropolitan location. Many entrepreneurs also hire more office space than they realistically need.
Moving out of your pricey office rental and into a co-working space could be a workable alternative. You and your team will still have all the resources required to work efficiently. Plus, like-minded professionals with whom you can collaborate, network, and brainstorm freely will surround you.
Another viable option is to gather a remote workforce who can work and collaborate from home. You can still have meetings and brainstorming sessions at a physical location. However, allowing your employees to work remotely can save you huge sums on both direct and indirect costs.
According to McKinsey, 62% of employed Americans have been working from home since the COVID-19 crisis took hold, compared to just 25% before mid-2020. The same study found that 80% of the people surveyed noted that they enjoyed working from home, while 41% reported additional productivity because of the high degree of flexibility offered by remote work opportunities.
Not only can reducing your physical office space benefit your organization’s finances, but it has the potential to benefit the mental and physical wellbeing and productivity of your workforce.
2. Untracked Essential Costs
It might surprise you to learn how many modern businesses still track their expenses on paper—if at all. Alternatively, many leave the task to their accountants, who will keep their finances in order but may not put in the extra work to reduce redundant costs.
Tracking your essential costs is absolutely crucial if you want to identify areas of overspending within your business’s operations. Investing in an AI-based expense tracing program can accurately pinpoint your company’s areas of over-expenditure and recommend targeted remedies without the risk of human error. Research now shows that predictive and prescriptive deep learning programs can outperform traditional expense tracking methods by achieving a 41% reduction in data classification errors.
Business experts also recommend using analytics software to identify which of your marketing efforts are contributing the most to your bottom lines. Cloud-based analytical solutions can help you to improve your digital and land-based marketing activities in a way that best supports your income streams.
Technology may run the world in the modern age, but people still determine the prices that businesses charge for their goods and services. That means you can influence the costs levied by your suppliers, at least to a certain degree.
If you have several suppliers, speak to them about striking deals that will keep your costs as low as possible. You can do this when you first partner, or once you have proven yourself to be a trustworthy, regular client. If they are not willing to offer you discounts or reduce your costs, you can always look for more flexible options.
Supply chain visibility is another crucial prerequisite for effective cost reduction and enhanced ROI. Consistent, clean and connected data is needed to fuel supply chain and procurement operations and to achieve a clear view of services, suppliers, materials and products.
Aligning your systems and supply chains with your suppliers will enable you to make informed decisions and to find new ways to reduce costs associated with production outputs. Considering that Deloitte notes that 60% of CPOs have named poor data quality and standardization as their largest procurement barrier, ensuring supply chain visibility may be a non-negotiable step in your quest for expense reduction.
4. Employee Turnover
Employees are a vital resource for every business, and they come at a relative cost. However, hiring new staff members to replace employees who've left is notably more expensive than retaining your current staff force.
You can increase your company’s employee retention rates and reduce turnover in several ways. Start by offering good salaries with benefits, and develop a healthy and supportive company culture where they can work effectively, and gain autonomy over day-to-day tasks.
Assigning accountability at the correct level can be an effective approach to reducing staff turnover and ensuring that cost-reduction measures stick, according to research from McKinsey. Many organizations have been able to redefine the ways they collect, report and utilize information to ensure that costs are broken out according to their producing organizational units. This approach assists managers to identify units and sales organizations rapidly that are responsible for significant cost increases, and to come up with a plan of action to control future expenses.
Assigning cost accountability also ensures that the staff managing those costs are not the employees closest to the decision-making process. This helps to ensure that cost management does not hurt your business.
5. Financial Mismanagement
Your business might not have a finance expert on board just yet. This is not an inherent problem, but it’s important to collaborate with someone who understands proper business financial management. This will avoid you losing money due to miscalculated, or poorly informed decisions.
Companies who lack financial controls such as spending limits, vendor selection, and check authorization protocols can experience devastating uncontrolled spending. Many top executives kick off their cost reduction efforts with a broad, unspecified set of cost reduction targets, but unfortunately, this “managing to a number” approach often leads to delayed essential investments, shifting costs between accounting categories, and cutting costs in ways that directly undermine revenue generation.
In this way, financial management techniques that are implemented with the best of intentions can actually lead to the same degree of financial mismanagement that was slated for addressing in the first place.
A more sustainable approach would involve changing the way your people view costs by implementing policies and protocols that model desired behavior. Simple, actionable examples include eliminating catering for in-person meetings and using video-conferencing tools for conferences instead of requiring staff to travel to the office.
Ultimately, your financial adviser should have a comprehensive understanding of how to review and interpret your fiscal statements and year-on-year performance, strategically minimize tax liabilities, apply reinvestment strategies to your business, and sustainably raise capital.
6. Annual Planning
Businesses who don’t plan adequately for the year ahead are left open to the whims of their owners and staff forces. Sometimes this can lead to implementing creative and innovative solutions—but mostly, it simply leads to excessive expenditure that could have been avoided with proper planning.
It’s essential to have a business plan in place to organize your team, operational strategies, and resources. Having a plan is particularly crucial if your business needs to reach certain milestones on a tight budget, or if you need to calculate how big a loan you’ll need before approaching investors.
A detailed plan can help your company to map and streamline its operations across human resources, finance, marketing, and admin, while setting an appropriate budget for each department. Without these plans in place, it may force you and your staff to make costly choices that fail to advance your business towards its long-term goals.
Research shows that benchmarks do matter when it comes to reaching expenditure reduction objectives. Internal benchmarks for travel, catering and resource expenses, among others, can enable managers to compare performances across units and identify tangible differences and trade-offs that may not be aligned with your organization’s strategies.
Internal benchmarks are easy to access and provide valuable insights that can be used to create comprehensive and accurate annual plans for over expenditure reduction.
The Bottom Line
There are two main factors that can land a business in financial hot water: insufficient incoming cash flow, or expenditure rates that are just too high. When both of these factors come into play at the same time, the results can be catastrophic.
Luckily, you can reduce overspending in your business and potentially improve cash flow by planning ahead, using purpose-built software to track your expenses, and by retaining your valuable skilled employees. You can also speak to your suppliers about securing favorable rates and slim down your physical office space rental costs, either by moving onto smaller premises, by sharing a co-working space with other professionals or by allowing your team to work remotely.