The profitability of a small business can be easily affected by even the slightest variation in certain operating expenditures that can silently eat up the company’s hard-earned revenues.
In cases where spend management software is not being used, finding the origin of this deviation can be tricky and it may require a lot of time invested in building reports manually to identify the source of the detour.
If you are currently experiencing a similar challenge, the following article summarizes five of the most common money drains for small businesses so you can narrow down the list of potential items damaging your firm’s bottom-line results.
#1 – Underused technology
Automation, artificial intelligence, machine learning, chatbots, and other similar software-as-a-service (SaaS) tools have gained popularity among small businesses as these applications allegedly increase companies’ productivity in certain areas and they can also drive customer conversion rates higher
However, purchasing or subscribing for too many of these services can increase the firm’s operating leverage, meaning that its profitability will increase significantly during times of positive top-line performance but will also suffer to a greater extent during sales downturns.
Moreover, it is important to make sure that any money paid to use these tools is contributing to improving the company’s productivity and efficacy at any level. There are many cases in which these services are underused and their contribution to the firm’s positive performance is either negligible or just too expensive upon performing a simple cost-benefit analysis.
#2 – Paper
The need to rely on paper documents to guarantee the adequate functioning of an organization is a thing of the past – especially as many solutions have incorporated elements like digital signatures and approval flow tools.
According to estimates from Gartner, the average company spends around 3% of its revenues on paper, printing, and document handling. If you run a business that has a gross profit margin of 20% or less, that 3% can be the difference between a profitable year and one in the red zone.
For this reason, paper-related spending could be another money drain for your small business and this should prompt owners to move to a fully-digital document handling model to reduce their overhead.
#3 – Non-essential personnel
Some activities within a company do not require hiring a full-time employee. Even though the reality can vary from one business to the other, many day-to-day tasks can be outsourced or assigned to a freelancer.
Websites like Fiverr and Upwork are among those that offer the services of professionals who can be hired on a per-project or hourly basis to perform one-time or infrequent assignments the company requires.
Money can be saved by hiring these individuals instead of bringing a full-time employee who will possibly generate thousands of dollars a year in non-salary expenditures.
#4 – Bank fees
Research from Money Rates has unveiled some estimates about how much people and firms pay in bank fees. One example is overdraft fees, which are, on average, $31 per occurrence while loan processing fees can be quite high – possibly eating up around 1% to 3% of the total financing obtained by the business.
Late fees, on the other hand, can also drain money from a small business, especially if owners fail to keep track of business cards and their key payment dates.
#5 – Ineffective marketing
Ineffective marketing can be a silent profitability killer for small businesses and social media platforms may have exacerbated the trend of overspending in low-conversion strategies and campaigns.
Paid online advertising can be quite effective but it is important to keep track of the results that this investment is producing for the company. To do so, small businesses should study multiple metrics including the campaign’s conversion rate, average purchase per conversion, and cost per conversion.
Successful campaigns can only be measured if targets have been set previously for these variables. For example, a business may aim to keep the cost per conversion below 15% of the average purchase per conversion in dollar terms.
By assessing the effectiveness of these campaigns by using objective data points, the business can determine if its marketing effort is either a big drain or a profitable endeavor.
Running a profitable small business can be challenging but there are ways and tools through which financial results can be improved including the adoption of spend management software to keep track and ultimately avoid some of the money drains mentioned above and others that may go unnoticed.