Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
Q: What are the most unexpected areas of overspending for a small and growing business?
A: First, let's step back and ask ourselves: Why would any expense be unexpected? I mean, as a small-business owner, are you sure you're getting accurate financial statements every month from your bookkeeper or controller? And do you understand what those statements say, or did you just use the closest QuickBooks chart of accounts template? I don't mean to be harsh, but to a money-focused guy like me, if you're overspending, it's a sign that you're not on top of your game.
That said: There are two key areas in almost any company where overlooked costs can spiral upward. What's insidious about them is that they may appear benign on your income statement--just the cost of doing business. It's not until you check the numbers against costs from the previous quarter or year that you see the red flags.
Cost of Goods or Services
Every business makes something or provides a service to customers (or both). The direct costs associated with this activity are recorded in the Cost of Goods or Cost of Services section of your income statement. However, I've found that with small businesses it's quite common for these costs to end up under Operating Expenses, where they're easily overlooked.
When I started working with a fast-growing security systems company, all payroll costs were lumped together under Operating Expenses. The owner believed that putting them all in one place made them easier to manage. But in reality, he had no idea how much his payroll was affecting his profitability and his long-term success. Unless all of these direct costs are correctly split out into the appropriate categories, there is no way to accurately calculate the gross margin on your products or services. At worst, you could be in for a nasty surprise--you could be actually losing money on each sale or job.
If this seems simple, it is. Yet I can tell you from experience that in rapidly expanding companies, many entrepreneurs inadvertently overspend in the Cost of Goods category in the name of growth.
Businesses have a laundry list of insurance coverages: workers' compensation, unemployment, general liability, general property and casualty, vehicle, health and other employee benefits. It's a lot of paperwork and a lot of hassle--so much so that many entrepreneurs are reluctant to change their routines, despite high costs.
When was the last time you shopped around for insurance plans? I'm not referring to the options your insurance agent/broker presents to you; rather, to you shopping among several agents/brokers to see who comes up with the best deal for your company.
While you're at it, ask each candidate to evaluate your current program for limits that are too high or too low and for areas in which coverage may be lacking entirely. If it's been a few years since you went through this process, you should be able to save at least 20 percent on your insurance premiums.