However, minor costs accumulate over time and can substantially drain your finances. Although it might seem like a nuisance, here’s why managing these smaller, hidden costs is critical for financial health.
All unmanaged expenses add up
Small, unmanaged expenses will negatively impact your company’s profits. If your employees can make purchases without going through a formal request process, what begins as a few small purchases here and there can quickly turn into thousands of dollars every year.
The most common expenses that slip through the cracks include:
- Repairs under warranty. When your team pays for repairs they don’t know are under warranty, and there’s no oversight to approve the purchase, your company loses out. Depending on your industry, you could be losing thousands of dollars every year to missed warranty reimbursements.
- Quick software purchases. Sometimes team members need a new application to move forward with a project. The problem with not vetting all software purchase requests is that decisions are made quickly, and if the software doesn’t work, there will be another purchase. When a purchase request is required, team members are more likely to do thorough research, knowing they might be stuck with their first choice.
- Software subscriptions. If you’re letting all those monthly software subscriptions slip by because they seem small, it’s time to start tracking them. Subscribing to multiple services for $30 per month could be draining hundreds or thousands of dollars each year, especially if they aren’t all being used.
- Travel expenses. When travel expenses aren’t formally managed, employees will book their flights and hotels however they want. This can lead to significantly higher costs that don’t get discovered until they turn in their receipts.
- Utility overuse. If you run an office, leaving the lights on or letting the heater run overnight can add up on your utility bills each month.
- Petty cash expenses. Say your manager heads out to get office supplies a few times a month, but those costs are never recorded. Each year, that can add up to hundreds of dollars.
- Duplicate expenses. If you’re not tracking all expenses, there’s a chance you may have sent duplicate payments.
When unmanaged and untracked, all of the above expenses can lead to discrepancies in your financial statements, incorrect budgeting, and inaccurate forecasting.
Unmanaged expenses reduce cash flow
With restricted cash flow, your business may struggle to meet financial obligations. For example, if you aren’t aware of having thousands of dollars tied up in unnecessary expenses, you might not have enough cash flow to pay certain bills on time. This can lead to late fees and poor relationships with vendors. There’s also a chance that your business might need to rely on credit, which will come with costly interest payments.
In a worst-case scenario, unmanaged expenses might delay essential maintenance or inventory purchases, impacting your ability to meet client or customer needs.
Neglected expenses lead to higher taxes
When you’re not recording your expenses, your taxable income is higher than it should be. Unrecorded minor expenses equal lost tax deduction opportunities. These expenses can include everything from simple office supplies to mileage, travel costs, and meal expenses.
Tips to start tracking all purchases
Tracking all purchases, no matter how small, will help you establish financial health. Here are some practical tips to do this effectively.
Use accounting software
Whether you choose QuickBooks, FreshBooks, Xero, or anything else, it’s crucial to automate financial tracking and categorize all of your expenses. Software makes it easy by automatically recording transactions through bank account and credit card integrations.
Require purchase requests
Stop allowing small purchases to be made without submitting a purchase request form. Limit the number of people allowed to make purchases without approval to one or two people only. For everyone else, create a formal request process and be strict about approvals. If you don’t fully understand how the request will benefit your business, ask more questions and don’t hesitate to deny a purchase you don’t understand.
Reconcile finances daily
At the end of the day, spend 10-15 minutes reconciling your finances by updating bank balances and checking to see what has been billed. This is the best way to catch problems before they become bigger issues.
Small savings add up
Tracking every purchase may seem like a tedious job, but the long-term financial benefits outweigh the effort. By implementing tracking systems, purchase approvals, and enforcing company rules, you can reduce wasteful spending and avoid unnecessary financial drain.