All businesses have expenses and should have mechanisms to help them create budgets and track spending. It is common for startups to focus their expense management efforts only on their overall monthly expenses. Unfortunately, this is the wrong approach and will make those startups spend more money than they can afford. It will also make them incorrectly calculate their liquidity and not be in a financially healthy place for them to continue long-term operations.
For optimal results, startups should ensure their expense management process should cover the following;
- Keeping a record of all business outlays
- Generation of monthly expense reports
- Creation of explicit and well-detailed financial policies
- Keeping all receipts
- Regular balancing of income and expenses
- Reimbursing employees for out-of-pocket business expenses
Here are a few expense management tips that will help startups manage their expenses effectively
- Start expense management early
Owners of startups should start tracking their expenses from the first day. They do not need any sophisticated software for this. An Excel spreadsheet will suffice at the start. As the business scales up, it will be more difficult and time-consuming to track past spending accurately. Starting the expense management process early will give the founders more time to focus on other pressing issues.
There should also be clear policies or guidelines regarding business expenses. This employee expense management technique would guide worker spending habits. It will also let them know the proper channel to submit their spending proposal for approval.
- Categorize different kinds of expenses
Looking at the startup’s overall monthly expenses, the owners might not grasp how effective their spending is. Many people think a startup’s finances are healthy if income is more than expenses, but this is not always the case. Sorting expenditure into categories would paint a clearer picture of where money is being spent. Analysis of each spending category will let the owners know how much their cost of production is. If the cost of production is higher than the business revenue, then the business model is unsustainable.
- Use Software to Track Expenses
As the startup grows, the owners should employ a finance professional or team to manage the business’ finances. If there is a lot of income and expenditure, it will help to use software to track them. Not only does it make the expense processing more efficient, but it also ensures accuracy and makes audits easier.
- Stop Overspending
Business owners should regularly analyze their expenditures to identify areas that cost more money than necessary. For example, a sales executive might be spending more money than their peers to convert leads, which could be solved with more training. Without in-depth analysis, this might be hard to spot and remediate. Frequent financial analysis and audits would make startup owners reevaluate their business expenses where necessary.
Expense management is key for startups because they are mostly at risk of burning cash without generating desired results. Lack of financial oversight can birth an unsustainable business model, which would make the startup shut down prematurely. Employee expense management is also essential, as it guides workers on how to responsibly spend their company’s money.