Introduction

Running a business is complicated. Not only do you need to get the best deals from your suppliers, you must also offer services or products at a price low enough so customers will buy from you rather than your competiton. In order to offer the best prices possible, you need to keep business expenses low. While most businesses  identify supply and labor costs as areas that can be targeted , other areas, such as taxes, employee turnoover, and late fees, can add to cost but are not as obvious.  To minimize overhead it is necessary to examine everything  that adds to it and identify the ways they can be reduced or eliminated.

Supply Costs

Perhaps the most obvious business expense is supply costs. Supplies can be raw materials that you use to manufacture your products or supplies you use for your general office use. To get the best deals on supplies you need to look at how you get your supplies, how much they cost, what alternatives are available, and how supplies are used.

As a former inventory manager I know that office supplies are perhaps the most abused and wasted business resource that businesses have. The problem is that most employees take for granted that office supplies are readily available for them to use, and they are under the impression that office supplies are relatively inexpensive and therefor it is alright to abuse their access to the supply. This mentality, unfortunately, leads to office supply waste, abuse, and misuse.

Office supply waste occurs when employees don’t utilize the full life of an office supply. For example employees lose pens frequently, they write only a sentence or two on a full sheet of legal notebook paper and then throwing it away, or they use more adhesive devises then are needed. All of these examples occur in most offices. So what is the big deal about your employees wasting office supplies? Well the bottom line is, is that it is costing you money. To think of it another way, they are wasting your profits. To illustrate how even marginal wasting can cost you in the end let’s examine a single employee’s potential for waste in a month, then multiply that cost by 12 to get an annual waste expense, and finally multiply that sum by how many employees are in a small business.

EXAMPLE:

Upon examining Employee A it was determined that he used two legal notepads per month, a dozen pens, six leads for his mechanical pen, five calculator rolls, and four reams of paper (used in making photocopies). Being an accountant this really didn’t seem excessive, until the manager really looked at how these supplies were being used. The cost of the office supplies that were used came to:

• 2 Legal Pads @ $0.82 each = $1.64
• 1 dozen pens @ $1.25 a dozen = $1.25
• 6 leads for mechanical pencil @ .5 X $1.28 for a dozen = $0.64
• 5 calculator rolls @ $1.05 each = $5.25
• Four reams of paper in copier (500 pages per ream) @ $.10 per page for paper and toner = $200

The total for this one employee for the month came to $208.78, with the majority of the expense coming from copies made. Upon examination of how these supplies were used it was determined that the employee was indeed wasting supplies. Employee A misplaced pens often, and also retrieved new pens even when his original pen still had ink left in it. It was also determined that he had a tendency to pull on the calculator tape and then tear it off instead of advancing the tape with the button just far enough to retrieve the printout. This wasted, on average, about twice as much blank tape as printed on tape. The largest waste really came from the copies he made. It was discovered that this employee made twice as many copies as were actually used. This happened because of misplacing copies, copy errors made by the employee, and by making excessive copies of materials that could be reviewed easily from the original source.

In total it was found that this employee wasted about $105 worth of office supplies a month, with the majority of this amount coming from unnecessary copying. If this amount is multiplied by 12 months, then the annual amount of office supplies that were wasted by this employee alone comes to $1,260. If this amount is multiplied by the number of employees in a small office of 10 people the wasted resources comes to a total of $12,600. This is quite a large chunk of change to be throwing away. This amount is further increased when the amounts of office supplies that are abused and misused are added to the money spent on wasted office supplies.

Abuse of office supplies occurs when employees use company supplies for personal use. This can take the form of stealing supplies from the supply closet to take home for personal use, or from simply using office supplies and machines for personal use without reimbursing the company. This can add up to hundreds or even thousands of dollars of year in non-company use expenses. In addition to the money that you lose from stolen or abused office supplies, your loss from office supply mis-usage is compounded by the amount of money that is lost because employees are using the wrong office supply for a job, or because they are using more office supplies than are required to sufficiently accomplish the task.

For example, an employee may paper clip a half sheet of legal notebook paper to a file instead of simply using a small sticky note. In this instance two wrong office supplies are used in stead of a single inexpensive office supply designed for the task. This one correction may only save you two cents, but when hundreds or even thousands of events per month compound this amount, the amount of savings quickly adds up.

The second way you can save money on your supply expenses is to find the best supplier for your office supply needs. To calculate the amount of money that you actually spend per item will be based on the amount of time needed to order or purchase an item, the list price of the item, delivery costs, time spent for processing the invoice, and time spent dealing with customer service for damaged items and returns. If you are dealing with a company that offers you low per item prices, but has bad customer service you may actually end up paying more money for your supplies than if you bought the items for a slightly higher per item price from a company that offers excellent customer service.

For example, if you buy your copy paper from an online store that sells you a case of paper for $20 which includes delivery costs, however, to order the items your administrative assistant has to call the company’s long distance number and spend on average 15 minutes to place the order then you are actually paying $20 for the paper + $3 for payroll expense + 15 minutes @ $.1 per minute long distance, or a total cost of nearly $25 for the case of paper if everything goes smoothly. This purchase price increases if there is a problem with the order, or the order is damaged and you need to return the item for an exchange. You will have to pay your administrative assistant’s wages for all the time it takes them to fill out claim forms and reorder a new case of paper.

To determine if your current method of buying supplies is the best for your company you need to compare the time and money that you spend each month compared to the estimated time and money you would pay if you used an alternative method. For example if you currently buy office supplies at a physical store your expenses would include travel expense to the store, employee time, price of supplies bought, discounts offered, travel expense back to the office, and bookkeeping expenses to enter purchased items into inventory and accounts payable. For companies that have offices close to an office supply store this may be a practical option as they can walk or drive quickly to the store location and return to the office in less than a half an hour. This may be more cost effective than paying a shipping charge and having to wait days for the items to arrive. However, to determine if your current option is the best you will need to make several comparisons including online stores that offer free shipping, physical store purchases, and utilizing delivery services.

Labor Costs

Labor is another area that a business owner can examine to see if they have any unnecessary costs. While the first area that most businesses target to minimize labor costs is often the size of employees’ wages, this is perhaps not the most productive angle to take. This is because competitive wages will help reduce costs that your business will occur because of turnover expenses, and losses in productivity caused by job dissatisfaction.

The real issue in regards to excessive labor costs, is often due to turnover expenses, which include recruitment expenses, training expenses, and low productivity while the new employee is training and becoming acclimatized to the new position. Employee turnover expense has been calculated to be about 16 months salary for the position being filled. For lower level positions like sales, turnover for a part time employee making $12,000 per year will cost the company $18,000 for training, recruitment, and loss of productivity per job that is turned over. If your company has a high turnover rate then this expense can impair your company’s ability to survive.

To combat high turnover rates and save money on turnover expenses, you can take a proactive roll in ensuring that your valued employees stay with your company. This can be done by providing them with a competitive compensation package, by allowing flexible scheduling options, by providing them with sufficient training and career development opportunities, and finally by recognizing achievements and contributions that your employees are making to the company. While some of these practices may cost you money, most of these things can be implemented without any cost. For example providing affirmations of jobs well done are free and they are just as effective in improving job satisfaction as giving a small raise in wages.

Business Taxes

Perhaps the most dreaded of all expenses are business taxes. Whether they are payroll taxes or business profit taxes, business tax expenses really need to be managed to ensure that you are not paying more than you have to. One way to help minimize business tax expenses is to make sure that tax reports are filled out correctly and that they are filed on time. This strategy helps to reduce business tax expenses by reducing the chances that you will be fined for filing late or for making a mistake that leads to an overpayment or an underpayment. To ensure that all tax reports are filed on time and that they are correctly filled out, you will need to (1) make out a calendar of due dates of specific tax forms and reports, (2) have the instructions for filling out each tax form and report on hand in hard-copy, and (3) make sure that the employee(s) that is filling out the reports is trained in doing so or has access to help.

The second strategy that your company can take to ensure that you are not paying more business taxes then you have to is to make sure that you are claiming as many business expenses as are possible on your income tax return. To ensure this you will need to (1) know what things qualify as a business expense, (2) what form or line the business expense will need to be accounted for on, and (3) how to keep track of your business expenses.

The first step is to know what qualifies as a business expense. To learn what qualifies for a business expense and how much of the actual cost is tax deductible you will need to read through IRS publication 535 Business Expenses. This publication outlines everything you need to know about business expenses when you are filling out your annual income tax return. For example, if you operate your business out of your home you can deduct certain housing costs from your tax liability, however, you have to first figure out what percentage of your home is used for business and what percentage of your home is used for personal use. Publication 535 goes over: deducting business expenses, employees’ pay, retirement plans, rent expenses, interest, taxes, insurance, costs that you can deduct or capitalize, amortization, depletion, business bad debts, electric and clean-fuel vehicle deductions, miscellaneous business expenses, and how to get help. It is important to familiarize yourself with this publication to make sure that you are claiming every expense that you can including depreciation expenses, bad debt expenses, and business loss due to disasters or theft. This publication also tells you where each type of business expenses will need to be accounted for and what forms you will need to fill out.

Finally, you need to know how to keep track of your business expenses to support your claims that you have occurred them in relation to your business operation and that you simply did not make them up in order to defraud the IRS. To keep track of your expenses you should have a filing system for all of your receipts and invoices for supplies; a separate folder for employment tax expenses including a photocopy of the reports, forms, checks, and payment coupons that you submitted to the IRS and state department of income tax; receipts for use of petty cash; and signed employee expense forms that detail what expenses you reimbursed your employees for. Try to keep your receipts organized so if you are audited, you will be able to quickly retrieve the receipts that you need to prove your deductions were valid.

Minimizing Business Expenses

To maximize your profits and ensure that your business will run smoothly, it is important to minimize your business expenses as they affect not only the price you charge your customers, but also your cash flow capabilities. To ensure that you are maximizing your cash flow you will need to make sure: that you are purchasing from suppliers that offer the best prices and the best customer service; that your employees are not wasting, abusing, or misusing office supplies; that you take steps to minimize labor expenses; that you understand tax requirements for taking business expenses as deductions on your income tax return; and that your company is trained sufficiently in filing required tax forms and reports and are aware of due dates. By understanding how each of these factors impacts your bottom line, you can take the needed steps to minimize your business expenses and maximize your cash flow.