A money leak means money that goes out of the business that is unnecessary. While these spendings may seem small and insignificant, once they add up, the amount of money spent is actually significant. This step by step guide may help a business owner systematically eliminate money leaks.
How to Identify Money Leaks
1. Pull out all the business’s financial records.
To identify a business’s money leaks, take out the business’s financial records in the past 12 months. These records include business bank statements and credit card statements. The point is to take out all the business’s financial records where business spending is happening in the past year because there are spendings that occur annually. It is also highly recommended to do this using physical copies of the statements.
2. Go through each line of expenditure item from each statement.
During this step, a business owner needs to ask themselves the following questions:
- Is this expenditure 100% necessary to keep my business running and operating?
- Can I run the business without this?
- Is it possible to run the business without this expense?
- Is it legally allowed to run the business without this expense?
If the spending is 100% necessary and not just something that’s nice to have, encircle the item with a red pen. Do this for every necessary expenditure item for all of the business’s statements.
3. Analyze if recurring spendings are delivering the business a positive return.
For recurring transactions, a business owner must ask themselves if the expense is delivering the business a positive return or a positive return of investment (ROI).
Not only does this apply to supplies and equipment but also the business’s workforce; is each team member allowing the business owner to save time or free up some time for them to be able to generate and bring in more money?
Again, if the expense is 100% necessary and not just something that’s nice to have, encircle the item with a red pen.
4. Identifying the Money Leaks.
After going through all the spending records, the business will now have items that were not encircled or highlighted. These are the Money Leaks. These spendings are not serving the business, are unnecessary to keep it running, and are not delivering the business positive ROI.
Now that a business owner has identified the Money Leaks, they can also start analyzing whether these spendings are still nice to have. These questions may help in this step:
- Is this a nice indulgent thing to have in the business?
- Will getting rid of this allow the business to bring more money home?
The goal in this step is for every business owner to see that there is a choice they need to make: to take home more money or to keep spending on the identified nice-to-have item.
I Have A Problem Identifying Money Leaks, What Should I Do?
You might think that identifying money leaks is a no-brainer. After all, won’t non-essential expenses be painfully obvious when you review financial records?
Believe it or not, many people find it difficult to assess whether an expense is essential to the company or not.
It’s important to note that money leaks are often disguised as an essential or integral expense in the company. Many factors come into play when you assess your company’s spending habits. For one, there’s personal bias or preference. As I’ve mentioned above, there are “nice-to-have” items that don’t necessarily contribute to the profitability of the business. However, if that item, regardless of its actual ROI, is something you perceive to be essential, it would be difficult for you to recognize it as a money leak.
If you ever find yourself in a similar situation, what should you do?
1.Take “The Last Date Of Use” Into Account
When decluttering your home, people suggest that anything you haven’t used for the past 6 months should be thrown out or given away. The idea behind such a straightforward strategy is that if you haven’t used an item for the last 6 months of your life (unless it’s seasonal; e.g. snowblower), there’s a pretty high chance that you won’t use it ever again. This may be a rule for decluttering a house, but I believe the same thing can apply to businesses.
Most online businesses, for instance, make use of several online tools and programs that they avail through a subscription basis. As per most subscription-based companies, users are automatically charged for the service on a monthly, quarterly, or annual basis. For all you know, you may have running subscriptions that you pay for each term but hardly ever use anymore. That right there is a money leak – and it’s something you have to plug up.
This is why taking the “last date of use” into account when assessing your expenses is important. It can tell you which expenses are still relevant up to the present time, and which ones are not.
2. Solicit The Opinions Of Immediate Users Or Receivers Of Such Expenses
Operational costs, especially for big companies, are often divided by departments. It could be that you have no idea that something is a money leak because you’re not the right person to decide so. If there are expenses that do not immediately affect you, you may want to consult the people who directly benefit or use the products or services that result from such expenses.
Going back to our example above, you may have employees in your online company who requested a premium subscription to specific software. After some time, these same employees may have found better alternatives to the software they’ve asked you to pay for before and they seldom use it these days. In other words, what was once essential is now a non-essential, and you wouldn’t know that if you don’t ask or check up on them from time to time.
5 Questions to Ask Before Pulling the Plug on a Money Leak
As a business owner, it may feel like money is just floating from your hands to your business’s expenses, instead of going into your savings or your pocket. You may also constantly wonder which expenses you can further remove after auditing. If you have already identified some money leaks in your business, maybe you are also looking into pulling the plug on these so you can save some money.
But before you do, here are five questions you can ask yourself first in order to evaluate if you should stop paying for these expenses.1. Am I Getting Something Out of this Membership? Click To Tweet
Not just business owners do this; even ordinary people are guilty of subscribing to membership only to end up not using them. This may be a membership or a subscription to a magazine, a podcast, a coaching or training group, or any service paid but you end up not using. If you are not using this membership or subscription, then this expense is just a money leak for your business.
But before pulling the plug, try to remember why you signed up for it in the first place. Write down using it into your calendar and try maximizing your membership. If, after 60 days you still aren’t using it, then it will be a good decision to cancel your membership.2. Is this a Duplicate Expense? Click To Tweet
Because technology is constantly improving, you may find your business paying for multiple software that is doing the same thing. An example of this would be invoicing software. Are you paying for QuickBooks, FreshBooks, and also Zoho Books? Do you really need all of these?
It may be a good step for you to compare all the services this software is doing and study, which is the most efficient. You may also need to look into newer software that can do most of the work you’re doing using your existing software. The truth is there are more modern tech providers that emerged, which are also better options for your business.3. Is this a Necesary Service Provider? Click To Tweet
Another spending business owners often miss looking into is their list of manpower. Many owners opt to choose full-time assistants, or administrative workers, when they work they can do may be assigned to a virtual assistant.
As you go through your manpower, study which people are necessary to your business and which ones you can outsource online or assign to seasonal workers. If they can work faster and they can give you more time to focus on bringing in more profit, then it makes good sense to keep them. If not, it may be a good decision to let them go.4. Are you Paying for the Lowest Fee? Click To Tweet
There are certain fees that business just can’t avoid. But if you’re going to pay for a third-party service, you need to do your research first and find out which one offers quality service for the lowest fee.
Make it a point to annually check how much your business has paid service providers, and look into others that have better quality and are cheaper. If you also plan to stick to the same provider, you may also try and negotiate a lower fee for the service package you are getting.5. Is your Tax Advisor Good Enough? Click To Tweet
Most business owners make the mistake of hiring a cheaper tax advisor when they can actually just hire an expert who can help them keep track of their tax expenses throughout the year. A good tax advisor or tax analyst is always worth the money because they help you save time instead of you ending up doing and redoing your financial documents.
While it is good to identify and pull the plug on your business’s unnecessary expenses, it is also wise to analyze if these services you’re paying for are giving you more time to focus on what’s important: thinking of ways to bring in more money to your business. Asking yourself these questions before pulling the plug on your expenses will end up helping your business save time and even money.
A Money Leak is unnecessary money spent by a business. In order to identify if a business has Money Leaks, a business owner has to study their business bank statements and credit card statements in the past year and analyze how necessary each expenditure item is. Once essential and indulgent elements have been identified, a business owner has to choose whether the business will take home more money, or they’ll keep spending on the nice-to-have item.
For more information about this matter, be sure to check out Episode 006 of Uncover Wealth Radio. If you’ve missed the LIVE broadcast, you can always revisit the episode here on our website, Annette & Co.