There’s a certain freewheeling allure to helming a business. You can draw from the company coffers as you like as you arrange meetings, hire employees, and handle the occasional indulgences needed to keep morale high. No longer do you need to be at the beck and call of the managerial level — now you have that power.
Unfortunately, this can be intoxicating. If left unchecked, it can spiral out of control and culminate in the establishment of financial habits that can damage or even destroy your business. Your Spend Culture — how you handle your resources — requires close oversight.
Are you providing sufficient oversight, then? Or are you allowing dangerous practices to lead your finances astray? Here are 5 red flags to watch out for (if you spot even one of them, you’ll need to rethink the way your company spends):
1. You’re Overlooking and Not Tracking Smaller Expenses
It’s quite common these days for companies or the finance department to be too fearful of being perceived as nickel-and-diming customers, clients or employees (being unreasonably regimented about even the most trivial of payments).
But your bottom line is what keeps you going, and no amount of goodwill or brand appreciation will keep the lights on if you keep choosing to ignore any amounts below a certain point. Everything adds up, after all, plus there’s the danger of a slippery-slope scenario: one day you figure you’ll spend $20 to get lunch, then this happens a few times more, and you rationalize that you’ve spent $80 on food for the team so there won’t be any harm in spending that again.
With the amounts creeping up in total and frequency, it won’t be long before you’re starting to see a serious dent in your finances. This doesn’t mean that you can’t buy everyone lunch from time to time (maybe you can afford it) — it simply means that you shouldn’t overlook those amounts of money. Keep records so you know how they’re tallying up.
2. You’re Expensing for Purchases “After The Fact”
There is nothing wrong with a well thought-out, established T&E policy. However, it is important to also be weary that reimbursing for ‘already occured’ expenses adds a lot of headaches for your accounting department.
Many times, employees go ahead and purchase certain items on behalf of the company, or treat out their clients for lunch, and requests an expense reimbursement for the spend weeks or months after. This affects company accruals and throws your books off balance.
A more extreme example could be that the expense was never a purchase that was approved, and there was no documentation or formal requisition that happened. If you see an increase of expenses that were not pre-approved, it is a red flag to watch out for.
3. Your Employees Use The Company Credit Card Like Their Own
Having a company account or a company credit card that employees can use when necessary is a great convenience for many businesses. If you trust your employees with that power, it can save you the hassle of approving countless requests for things like milk or coffee granules.
The only problem with that approach is that they’ll take your lead when it comes to resource distribution, and if you allow the impression that money is no issue, they might be left to feel that there’s no reason to be frugal. This is particularly plausible if you tend to shield your employees from the financial reality of your situation (bad or good).
So if it’s clear that your employees are placing orders using company money without even thinking about where the money is coming from, you should first take back the reins, and then fully review your company-wide spending habits so you can turn things around. Using a system allowing you to set approval thresholds will be a great start, and establishing a clear Spend Culture of accountability. Trust, but check, and make sure there are controls established.
4. You Have No Long-term Business Development Plan
Staying static isn’t a good option in business, because even if you endure, your competitors will be striving to get ahead — to get better, more efficient, and more profitable. This goes beyond emergency funds to the fundamental development of your business. Where do you want to take your company in the next decade? Where do you want to be after that time?
The reason this is so vital is that you will need to make short-term sacrifices if you want to reach particular goals. Maybe you want to double the size of your team and move into a much larger office building within the next 5 years: if so, you’ll need to cut down on company expenses today so you can cover the initial bump in financial demands that will come with such a move.
This also applies to matters such as training and procedural improvement. You should be investing in your employees today to make them more effective tomorrow, and finding ways to implement forward-thinking operational tools such as smart HR tracking apps, marketing automation workflows, or logistics software suites.
If you have no long-term plan whatsoever and are simply living in the moment, that’s a huge red flag from a financial standpoint, because it will allow you to be very lax with your decisions. Remember that your company is an asset to be protected and cultivated over time, and think about the future as well as the present.
5. You’re Not Sure Where Your Money is Going
Keeping track of your incomings and outgoings isn’t something that comes naturally to most. So many things go into the running of a company (encompassing everything from office rent payments to payroll) that it’s common for smaller things to be missed, particularly if you’re fairly new to the executive responsibility.
Take a look at the most recent financial statement for your business. Do you recognize each payment and invoice on there? You should be able to clearly trace every individual transaction to a project, client, or operational commitment, and there needs to be a clear audit trail for every single purchase. Anything unfamiliar is cause for major concern — for all you know, someone is conducting financial fraud under your nose. According to APQC, up to 2% of organizational spend could be maverick spend, which could cause your organization millions.
This is something too important to be glossed over or simply assumed to be totally fine. If you’re anything less than certain about the direction of your money, take action immediately.
Does any of these red flags seem familiar to you? If even just one of them applies to your business, it’s a sure sign that you need to pay a lot more attention to your Spend Culture — and if you tick multiple boxes, then you’d better drop whatever else you’re doing and get your finances in order before it’s too late.