Running a company is expensive. If you hope to make a profit while keeping prices competitive, you will need to minimize your operating costs wherever possible. At the same time, there are some business expenses you should not cut from the budget.
Many enterprises spend too much on avoidable or unnecessary expenses. However, if you want to cut costs effectively, you must recognize the spending areas you should always include in your budget. Here are five such essential expense categories you should think twice about before cutting.
Regulatory costs are the most important business expenses to consider. While some of these fees may be expensive, they are far less than the cost of noncompliance penalties or — in a worst-case scenario — losing your right to operate.
Most companies require state and federal licenses to operate legally. Depending on where you work and what industry you are in, the accompanying fees can cost several hundred dollars. Many licenses also expire after a set period, in turn requiring renewal and more permit-related costs.
In some cases, you can get additional permits that may not be mandatory but let you perform services that set you apart from the competition. Whether this spending is worth it depends on your local market and what you specialize in. For most regulatory costs, though, the only way to minimize them is to avoid penalties. Review all applicable regulations to determine your necessary licenses before setting a budget.
Employee expenses are a more contentious area for many organizations. Wages and benefits can be some of your biggest operating costs, so it makes sense to want to reduce them. While spending too much on your workforce is possible, lowering salaries is not always ideal.
At the most basic level, your business needs staff to work efficiently and the law requires you to pay them a certain amount. It is often best to go above and beyond these minimums, though. Offering a competitive salary and benefits package may cost more, but it can also lead to more productive and engaged employees.
Many companies today struggle to retain staff because people have more employment options than ever, so they often leave for better-paying positions. Considering hiring and onboarding are far more expensive than keeping a good employee, it is typically best to offer better compensation in the first place.
Insurance is another crucial business expense you should not gloss over. Some forms of insurance — such as vehicle insurance and worker’s compensation — are mandatory in some areas and industries. Others may not be a legal requirement but are worth the cost, considering how much they save in an emergency.
Professional liability insurance minimizes legal costs from claims from dissatisfied customers, which is ideal for some high-risk products and sectors. If your brick-and-mortar facilities reside in storm-prone areas, you may also consider flood or wind coverage for your building. You can determine what insurance you need by reviewing your enterprise’s costliest and most likely risks.
In some cases, you can write off business insurance on your taxes because it is common and necessary in your industry. Remember to capitalize on that opportunity to minimize your expenses without sacrificing safety.
Depending on your industry, equipment costs may be another class of unavoidable business expenses. Just as you need talented and engaged employees to work efficiently, you need the right tools for the job. Opting for the least amount of or cheapest possible machinery may seem smart initially, but it often leads to low efficiency or poor-quality output.
Of course, you do not necessarily need top-of-the-line machinery in every instance. Making the most of these investments is often more about selecting the optimal tool for a specific use case rather than simply spending more. Determine how much you should pay by comparing prices to expected depreciation, any resulting savings from efficiency and equipment longevity.
Maintenance is another crucial spending category, especially if you use high-end equipment. Regular maintenance may seem expensive, but it saves money in the long run by preventing costly, disruptive breakdowns.
As the internet’s role in life and business grows, your organization’s web presence is becoming increasingly important. Consequently, building and maintaining an engaging website and social media channels is now a critical business expense.
A well-designed website and carefully curated social media profiles will help you reach new customers and engage existing ones. Expanding your web presence will also provide more data on your customers and target markets. Direct, personalized marketing drives sales and increases loyalty, and the only way to achieve it is through this data, so take advantage of this opportunity.
Social media marketing, web design, search engine optimization services and cloud infrastructure to enable a more responsive website are all worthwhile investments. You can determine where to focus this spending by learning more about your target audience. If you want to reach younger consumers, mobile-optimized websites and social media are ideal, whereas a B2B business may prefer to pay for email marketing.
Effective saving starts with recognizing where you cannot afford to cut corners. These five business expenses are all areas where a little more spending is worth it in the long run. Whether they are a matter of legality, efficiency or long-term savings, these cost categories deserve dedicated room in your budget.
It is possible — and recommended — to approach these expenses carefully to see how you can avoid spending too much on them. Simultaneously, reaching only the bare minimum in these areas will end up costing you more than you would initially save.
Eleanor Hecks is editor-in-chief at Designerly Magazine. Eleanor was the creative director and occasional blog writer at a prominent digital marketing agency before becoming her own boss in 2018. She lives in Philadelphia with her husband and dog, Bear.