Predicting business expenses for better financial management

Every business needs to predict the outgoing expenses for maintaining a stable state of finances. These include variable, fixed and miscellaneous expenses incurred for smooth functioning of a business. A sound expense management system is an essential for every organisation. Controlled finances not only lead to improvements in retained earnings but also better growth and profitability for the business. And improved profitability in turn paves for opportunities to build more assets and expand the enterprise, thus making it more competitive in the long run.

1. Defining and recording accurately
The first step is to account for and define business costs such as machinery, production, electricity, labour, stock of goods and sales expenses. Responsibilities for recording expenses must be clearly defined. Quality and accuracy parameters for these entries must be communicated well in advance. An appropriate online expense management software should be used to record all expenses as and when they occur. Besides, managers and project leads must ensure that staff members are recording their reimbursable expenses as and when they are incurred. An expense policy must be clearly defined and communicated to all the employees. It must be ensured that all employees are following the guidelines mentioned in the expense policy.

2. Analysing past expenditures
All team leads must forecast periodical expenses by carefully analysing expenses incurred in the previous period. It is their responsibility to carefully understand the past leakages and extras to predict and control the future outcome. Getting these approved by the management may be a humongous task. This requires careful analysis of the areas where the costs can be controlled and areas where they will surely be controlled.
These could be related to employee expenses, production expenses or asset creation. External costs like pricing of raw material and other inputs need to forecasted with precision.

3. Future targets
Employee expenses need to be forecasted by analysing the current strength of the team and their current level of expenditure. Reasonable targets should be set for achieving reduced expenditure or improved productivity or both. Production costs need to be defined using demand and supply projections. These should be understood vis-a-vis external economic and business conditions.
Shorter time periods for forecasting expenses brings in more focus and accuracy into the process. A twelve-month period is considered to be standard for predicting business expenses for most businesses. Some service businesses may opt for shorter time durations.

4. Defining control areas
While submitting the expense report, every team lead must define the areas of control and how these targets would be achieved. Employee cost controls to be achieved through motivation and training sessions. Production cost controls to be achieved from getting new vendors for the raw material used. All such areas of improvement should be clearly defined and accurately stated.
Productivity targets of employees should be defined using the past time tracking and the achieved goals data. The cost of current and future manpower requirements should be clearly accounted. The productivity data becomes useful while deciding manpower requirements.

5. A holistic process
Each and every employee of the organisation should be involved with the process of forecasting expenses and defining control areas. A process of self analysis, with respect to cost and productivity, provides motivation to perform better on the individual level. Financial management and expense forecasting processes achieve better accuracy levels when initiated and implemented from the micro-level to higher levels in the organisation.

(About the author: The article has been written by Veronika Tondon, who is a business enthusiast. She writes about emerging technologies and opportunities for business.)