This is part 3 of Ravit Insights series on the 7 Cash Flow Drivers essential for SMEs.
Image credit: Mario Gogh via Unsplash
If you run a business, can you name the figure it takes to keep your business operational off the top of your head?
Pretty unlikely.
The amount of money you’re spending to keep your business operational is an important figure. But it’s one that is often difficult to understand because of hidden costs and expenses that sneak up on you.
Cash flow negative: How much money you spend is a negative cash flow driver.
Common operational costs (here we aren’t referring to the costs it takes directly to produce the goods or services you sell) include rent, staff, general admin costs and things like stock and subscriptions.
While this seems straightforward, making mistakes in calculating your expenses is a relatively common error for business owners.
If your expenses are outrunning the amount you make doing business, you’re likely to find yourself in trouble, especially if you don’t know it’s happening!
There are a few ways you can keep track of what you’re spending operationally.
Keep track of your expenses
Firstly, is making sure you have a record of these expenses at all.
A colleague running a small business often considers the admin involved in tracking expenses too high a hurdle to cross, but her cash flow, not to mention profits are likely to suffer for it.
If she decides to grow her business, making sure this fundamental tracking is in place will become essential to sustaining her cash flow as she expands.
A sound budget and a financial model will be two invaluable resources when it comes to keeping track and making sure those operational costs are under control.
Here, accounting software like Xero, MYOB or others are your best friend.
Establishing value
It’s important to look at the type of costs, for example, a rule of thumb is to have marketing spend that equates to 10% of revenue. This could vary depending on the cycle / stage of your business.
Looking at benchmarks for businesses in your industry to understand ratios for your industry can be very beneficial. It can give you a reference point that you can strive for, as well as measure against the current state of your business, for example, if a standard set of expenses is 10% of revenue for an established business, it might be more if your business is early stage, or you’re going through a cycle of expansion, meaning you’ll need to invest more.
You’ll need to consider:
- Marketing
- Admin and accounting
- Staff wages
- General office expenses
- Utilities and technology
Fixed costs
The first costs to consider are fixed costs or occasional purchases that can’t be depreciated.
These may come weekly or monthly and are recurring. Here’s a brief guide to what you’ll look out for here:
- Rent
- Bills (electricity, phone)
- Ongoing marketing (e.g. social media advertising)
- Insurance
- Adviser fees
- Bank fees
- Contractor or staff wages
One-off expenses
Although variable, to start your business, or on an ongoing basis you’ll need to make single purchases which has no further benefit and you won’t account for depreciation over time.
These could be something simple like stationary or a one-off fine. Examples could include:
- Stationary
- One-off promotional or marketing costs
- Fines
Hidden costs!
The sneaky expenses are often ones that you have set up as a direct debit or have committed to long ago. A few we often see are:
- Subscriptions (magazines, newsletters, software)
- Industry memberships
- Accounting or legal fees
- Entertainment costs
Again, the key with expenses is to know what they are, and make sure they are working for you.
You’ll need to spend money, whether it’s on support staff, inventory or contractors to grow or even build a sustainable business. Use your budget and financial model to ensure you’re finding the right balance.
Check out the other cash flow drivers all business owners should understand.
