Controlling expenses is critical for a successful business. The first step is developing a business plan that outlines the major objectives and goals for your business. Next is developing a line-item budget from the business plan. Each major expense, such as marketing, is broken down into individual line items such as advertising, sales expenses, social media and publicity, all of which should be reviewed on a monthly basis.

Variance Analysis Helps Control Expenses

The line-item budget gives you control of the financial management of your business. Each line item in the budget is compared to actual expenses and the variance calculated as both a dollar amount and as a percentage. The next step is to review which expenses have a significant variance and why. A positive or negative variance is neither good nor bad in and of itself. It's the reason behind the variance that's important. For example, wages can have a negative variance or be overbudget because a new employee was hired sooner than projected. That's fine if the need for the employee was generated by a positive sales variance.

Staff Involvement

A line-item budget lets your staff know what they can expect as far as expenses. Working with your staff to develop the line-item budget gives them a vested interest in keeping to the budget. Reviewing the variance analysis with your staff gives them a chance to explain the differences. Using the previous year as the basis for the current year's line-item budget is not difficult to do.

Advantage for Cash Flow Projections

A line-item budget helps you recognize when a cash flow shortfall might occur. For example, you project a significant bump in sales for the third month. You give your customers payment terms of 90 days, so while the profit-and-loss statement shows the revenue in the month the sale was made, you won't get the cash until three months after the sale. However, you may have to pay your vendors for the inventory in the same month the sale was made. Identifying the shortfall in advance gives you time to prepare, such as obtaining a line of credit.

Micromanagement and Other Disadvantages

Sometimes there is a tendency to budget each miniscule expense in an attempt to control costs. In other words, it's not necessary to track the cost of office stationery separately from expenditures for copy paper and mailing envelopes. The line item of office supplies should cover all the items. Another disadvantage is the tendency for department managers to feel entitled to the same level of funding they received in prior years. Additionally, at the end of the year, managers may feel they have to spend all their budget, whether it's necessary or not, to protect the following year's budget from being cut. Departments might compete with each for a bigger share of the budget, rather than look at what's best for the company as a whole.