While Expense Management is a simple concept to understand it is not always easy to achieve.
Expense Management (EM) is critical to the “success” of every person or business. When COVID-19 hit, expense management moved to a whole new level of importance to allow businesses and individuals to carry on. In an era of post-pandemic inflation, controlling your expenses is more than a wish – it has become a necessity.
You learned the principles of managing your expenses at an early age, as soon as you had pocket money – either earned, or given as an allowance. In order to make purchases, your income must equal or exceed the outgoing costs. In some cases, you can accumulate revenue over a period of time, also known as savings. So if a bicycle was your target but you wanted to have bubble gum to chew on the way to school, the only way that you could accelerate your purchase of the bicycle was to limit the number of times you chewed gum.
Like in childhood, when you had to decrease the number of times you could “chew gum”, you might be once again learning to cut back on your expenses in order to have the funds you require to get through the hard times.
Here are 3 tips for improving the management of your expenses.
Record All Expenses
You cannot measure what is not recorded. So the first “best practice” of controlling your expenses is to record every expense you make – no matter how small. You might think that chewing gum is such a small expense that you don’t need to capture it. However if you are going through a pack a day at 87 cents each, then over the year that becomes $317. Forgetting this minor cost can have a substantial impact when you are trying to cut back. For example, chewing half as much gum would provide $158 to be saved for the bicycle or spent elsewhere.
Expenses can be recorded in a variety of ways: pen and paper, spreadsheets, accounting software or an expense tracker app. This Forbes review says that Mint is popular, easy-to-use free app that has been around since 2006.
The primary reason that you need to record all expenses is that you cannot make decisions on “what can stay and what can go” when applying cost-cutting measures unless you know all of your choices.
On a personal basis, some of your expenses may have gone down because you are working from home or have been doing less socializing during the pandemic. However, if you do not record your expenses then you may not have realized that the cost of your groceries has increased or that you are paying more for car insurance, not less as you might have expected.
If you are running a business, these expenses are often recorded on a scheduled basis – monthly, quarterly or annually. But in changing times, you may want to increase the frequency so that you can adapt in a shorter time frame.
If you are recording your expenses for personal purposes, then monthly is a good duration – every time that your credit card or bank statements arrive.
Prioritize All Expenses
When you were a child, getting the bicycle was very important. However, so were instant gratification and peer acceptance. Therefore, if you had to give up chewing gum completely, you might have decided that owning a cycle was “not for you”. On the other hand, if you really wanted your freedom on wheels, then maybe chewing less gum, or buying a second-hand bicycle was a compromise that you could live with.
The same concept applies to your personal adult life and/or to your businesses.
Once you have recorded your expenses, then you can make decisions about what is most important to you. If having a new shirt is important, you might forego a few containers of ice-cream or buy no-name cheese instead of your regular high-end brand for a few weeks.
If you are running a restaurant for example, you may decide that the quality of the ingredients is more important than having variety on the menu. This means that you may have to alter the recipe slightly or find a new source of ingredients. If quality is your priority, then you might be able to cut expenses by removing one or two items off your menu or only offering them on weekends as “specials”.
By recording and prioritizing the outgoings, you begin to realize that you cannot always spend on everything that you would like, especially in tough or insecure times. Decisions must be made and it is important to know what your “priorities” are.
Create a Budget
As a child, maybe you were given an allowance of $1 a week and could earn $1-3 a week doing errands. The more you made, the sooner that bicycle could be yours, especially if birthday gifts came as cash. If you cut your gum-chewing in half and only bought one coke on the weekends, you could save even more. If you bought the neighbour’s bike instead of the one you saw at Walmart, your dreams would be achieved sooner. That was a simple Budget. It may have indeed been your “first”.
And although you may not be your favourite thing to do, creating a budget is absolutely essential to keeping your personal and business expenses on track.
During hard times – such as the COVID pandemic with all of its uncertainty or as inflation creates rising costs – your budget should be reviewed and reconsidered – on a frequent basis. These situations can impact not only your income or revenues, but also provide you with unexpected expenses.
During the pandemic, you may have been working at home. This may have required investing in some new furniture or technology. A reduction in travel costs or clothing may have benefited your budget substantially. But was it enough to offset the additional costs that you incurred? Only if you look at our short and long-term budgets, can you tell if you will come out on top. Or will expenditures on your home merely put you in debt over the long-term?
This same theory applies to businesses. Does the budget allow for keeping an employee on payroll? Perhaps it will set you back in the short-term, but save on the costs of hiring and training later and allow you to come out further ahead? Would this action mean a faster recovery – post-COVID or post-inflation?
Some costs need to be entered in your budget because they are permanent – such as rent or mortgage. These fixed expenses apply to both your personal and professional lives. They form the starting point for your budget because they are known and are generally also a priority.
Sometimes the creation of several budgets – substituting scenarios – are required to get a clear picture of how to move forward. Your budget, once adopted, becomes your plan for the future. Yogi Berra said: “If you don’t know where you are going, you’ll end up someplace else.”
All our lives have changed because of the pandemic and post-pandemic inflation. Uncertainty does not need to cause panic if you have a financial plan or budget and adjust it as the circumstances change. However, in order to know where you can and will change or cut costs, you must know all the facts and issues that are within your control: what are your costs of doing something, what are your priorities, and what choices can you make to adapt.
These same principles apply to everyone in your family and/or business. In order to have them participate, it is important to share your priorities and ensure they also understand that budgets, once decided, are not open to negotiation.
While a budget will provide the big picture of incomings versus outgoings over a period of time, expense management is itself a simple concept:
- Record every expense – no matter how small or large
- Prioritize every expense – what is appropriate for your circumstance (or not)
- Create a budget – based on the reality of the day (and stick to it).
Life is filled with uncertainty! Your financial well-being does not have to be one of them – if your expenses are managed carefully, and you adjust your budget realistically and frequently.
Do you have a budget? How frequently do you review it? What tips on budgets do you have to share?