Growing up, even as kids we have heard this saying, 'A penny saved is a penny earned!', but nobody understands this better than a person who has struggled with his finances. And, most of us have at some point of time or the other, gone through the experience of struggling to keep our expenses under control.
For a small business, especially in a resource constrained environment, which it inevitably is, the demands on time of the owner are huge. In many cases, it comes down to choosing between,
- Do I focus on growing the business?
- Do I drive operational efficiency?
- Do I focus on keeping employees happy?
- How to keep an eye on the competitive environment?
- And many more such aspects….
While the answer for most businesses, is not just focussing on one aspect but, on multiple aspects of the business. It usually comes down to whats on fire? Meaning focusing on an aspect of daily operations which requires your attention today, or now.
However, there are some aspects of the business which can be kept an eye on a regular basis, especially those aspects which can be recorded. Keeping track of every little transaction in your business, can be a painful task. Sometimes more so, especially when there is a team which is expected to do this.
One such aspect is expenses or costs. For a small business, which struggles for top-line and bottom line at the same time, in a competitive environment, keeping an eye on costs, can be the difference between a sustained profitable business and a business that struggles.
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An ability to break down expenses in multiple buckets - branches, cities, vehicles, people (individuals), departments etc., can mean, that you can hold each of these individual buckets accountable for their performance. These are known as cost centres. Associating the revenue and cost with certain identifiers helps you break down your business into smaller buckets.
A simple example can be a textile business with 3 sales personnel, keeping track of the sales, discounts and expenses for each of the sales personnel. Lets assume, the focus for the month is to maximise the profitability while achieving sales value targets. Tracking each sale with an individual sales personnel with the freebies that he might be throwing in and the discounts that he is offering is part of the cost centre approach. Here each of the sales personnel can be considered as cost centres. This can help you focus on helping the weaker sales personnel who,
- Achieves sales value targets but at a lower profitability,
- Does not achieve sales value targets but high on profitability (does not give discounts)
- Somebody who manages to achieve the right balance while staying within limits of the discounts one can offer
Another example is a firm which is into the travel business, popularly known as 'Tours and travels' business in India. Such firms typically like to measure the utilisation of their vehicles and the profitability of each of them, especially since this is a hyper competitive space. So, a firm which has 5 cars on rent, which are driven by 5 different drivers, would certainly want to know the profitability of each of the cars. Here, each car would be considered to be a cost centre, which you might identify with the distinct registration number. The firm would want to allocate costs related to fuel, driver salary, road tax paid, tolls paid, driver allowances, etc., and assign them to each car. The revenue earned from each trip in the form of minimum fare + day fare + tolls + driver allowance can also be bucketed into each car. At the end of the day, this cost centre based approach, you can determine the profitability of each car, the number of trips of each car, the distance travelled, revenue earned, costs incurred on repair, places where you exceed budgets etc.,
A Cost centre can also be as simple as a department in your business, such as marketing, production, sales etc., to which the expenses incurred can be allocated and tracked. This provides valuable insights into costs incurred for each department and identify the expenses that you can cut down.
This is extremely valuable data for the firms owner to determine actionables to improve the efficiency of his operations by keeping an eye on costs, underutilised vehicles, overstretched maintenance of some vehicles, etc.,
Having software tools that help you manage this can significantly impact the efficiency and, control of the business by the owner. TallyPrime has the cost centre feature built-in and, is being is used to leverage the power of information, by millions of businesses.
It is smart business tools and processes that, when implemented by businesses, make life easier for the owners and businesses more profitable in a sustained manner.
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