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The 5 Most Common Reasons Small Businesses Overspend

Spend Control Start-up Business

At some stage, every small business owner will deal with overspend in their efforts to grow their business. We work with many customers and the same reasons keep popping up. Here are the most common five we’ve come across and how you can avoid wasting company money by getting tripped up.

Lack of planning

Without planning & budgeting, a business is always vulnerable to overspend. 

A financial plan is key to organising your team, your resources and your strategy. A plan is especially important when you want to achieve certain goals on a shoestring budget. Budgeting can help your business plan out activities and introduce controls across all departments - marketing, production, finance, human resources and admin. Without these controls in place, owners and staff can easily make costly decisions that end up damaging rather than strengthening growth.

No Data Intelligence

Unlike big companies, it's unlikely you'll have powerful reporting tools to help you easily track, analyse and interpret spend data across the business. Most businesses we talk to manage everything to do with spend and budgets in Excel spreadsheets or a combination of spreadsheets and accounting software. As a result, many of them go through the similar experience of not realising they were regularly overspending with particular suppliers/on certain cost accounts for months on end. Once they did go through the numbers and realise, the complicated process of trying to claw that money back begun. 

Spend intelligence can help you identify where your money is going in real time. Any anomalies, overspend or errors can be corrected as soon as they happen, so you never risk losing money as you grow. Exploring software solutions that collect and interpret spend data is a great way of keeping your money on track and making sure you stop spending it on anything other than growth. 

Wrong suppliers

Small companies will often buy things from the first supplier they find in an effort to get a problem solved in the shortest time. The problem is, with no shopping around and no tracking of costs, it's very easy to end up using suppliers who may not be the best fit. 

A supplier who's already working with you in one area (say, design) may not be the best choice for another area (say, sticker printing). By finding the right suppliers and tracking what you are paying them every time you use them will not just ensure you get the best product/level of service, but will limit the risk of overspending too. 

Cost of goods & services

Most businesses make something or provide a service to customers (sometimes both). The direct costs from these activities should be tracked and recorded under Cost of Goods or Cost of Services in your income statement. But small businesses often allocate these costs to Operating Expenses and so they end up being overlooked.

Unless all these direct costs are tracked, controlled and correctly split into the appropriate accounting categories, there is no way of calculating the gross margin on your products or services. Worst case scenario, you could actually be losing money on each sale. 

Bad Accounting

In the search for revenues, but in the absence of honest cost accounting, businesses end up subsidising customers while believing that they’re building a customer base.

In If You Really Want to Change the World: A Guide to Creating, Building, and Sustaining Breakthrough Ventures, Henry Kressel and Norman Winarsky give an example of just how damaging bad accounting can be:

"You might think running a business without clear cost accounting is so ridiculous that it couldn’t happen. But it can and does. 

A software company once came to us seeking funding. It had excellent products and annual revenues of $100 million. It was noteworthy, however, for its inability to be profitable even as its revenues grew by 30% each year. Annual operating losses exceeded $20 million, and these losses increased with increasing revenues. How could such a promising company do so poorly financially?

The reason was erroneous accounting, as became obvious when we looked closely at its cost accounting. Although the gross profit margin was 80% (quite reasonable for a software company), the actual product costs were about 110% of the sale price. The reason? Each sale involved a huge amount of customized engineering and services to install the product and train the customer to use it. These costs were hidden under the heading of “marketing” or R&D costs, and were reported as such to the board of directors.

It was clear that the company had an unsustainable business model, because the products were being sold at a loss and most of the engineering was devoted to customer installation support, not product development. But the investors weren’t aware of that. As revenues grew, so did the losses. It was clear the company had to change its pricing structure or it would go out of business."

Any of these five overspend reasons could seriously affect the survival of a small business. A combination of them however can be catastrophic. From founding to product launch and through growth, make sure you keep your spend under control. It is far better to be safe rather than sorry and big cash reserves can easily vanish when you have a leaky boat situation happening within your business.

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