10 min read

Being Frugal vs Splashing Cash: When to spend and not to spend?

Just as we begin to emerge from the worst of the pandemic, we’re hit with rocketing energy costs and rising inflation. As we hurtle into a cost of living crisis, making financial decisions – both personally and professionally – can feel overwhelming and in all honesty, a little bit scary.

As rising prices affect budgets, big decisions need to be made around where to tighten your purse strings, and which areas to invest in to give your small business the best opportunity of weathering the storm.

Should you cut back on marketing? Recruitment? Equipment? Premises? Or will a frugal approach mean your business misses out on opportunities and starts regressing? There’s also the concern that your customers are also facing the same dilemmas. Do you have a plan in place should your customers stop spending?

Here we explore how to calculate and make decisions on when to spend (and not spend!) money on your business.

What is a spend analysis?

As a business owner, you’ll likely have a fair idea of where your money is going, such as salaries, rent, utilities, and software. However, this is only part of the picture. A spend analysis creates an understanding of your business’s spend structure, enabling any decisions and actions you make to be based on facts rather than intuition. It offers a clearer level of detail – showing what’s actually happening to your business’s cash. And, most importantly, it finds actionable insights to help you make changes to become more profitable. For example, payments that you weren’t aware were being made, double-ups, or overpaying for an item that is more affordable elsewhere. The resulting report includes recommendations that outline actions to be taken, and, depending on the size of your business, by who.

Working with an accountant to understand your current financial position and conduct your spend analysis will help you make informed decisions about where to remain frugal, and where to invest as part of your preparation for any changes in income. If your budget doesn’t stretch to an accountant, consider using accounting software to gather the figures you need for your own analysis.

Step-by-step: How to do a spend analysis

We’re going to quickly take you through the steps you’ll need to take to conduct your own spend analysis. Click on the dropdowns to read more. 

  • Step 1: Set goals

    Make sure you know what you’re trying to achieve from this process. A common goal is visibility. You need to see who’s spending what, and why. Where is your money going? Which suppliers are you spending the most money with? What are your main categories when it comes to expenses? 

  • Step 2: Know where your spend data is

    As a small business owner, it’s likely you’ll have main admin access to the data you need, but where your time will be spent is in bringing it all together (a centralised spending platform could offer ongoing ease here). To make the right financial decisions, you need to use every tool at your disposal. The most successful companies drive their productivity (and even profitability in the current economy) by connecting disparate sources of spend data for greater access and visibility into company spending. They are connecting the dots to make the best data-driven decisions.

    Subject to how you’ve structured your company spending, some common places to access your spending data include:

    • Company credit cards and associated bank accounts
    • Invoice processing
    • Procurement tools
    • Payroll tools
    • Your ERP (enterprise resource planning)
    • Any other finance spreadsheets/documents in place

    A study by Aberdeen Research of 606 companies around the world with 1,000 employees or fewer, (commissioned by SAP Concur – a travel and expense management service), shows that ‘best-in-class’ performers are managing 74% of company spend using digital expense and invoice management technology, with more having integrated these systems with back-end ERP and other finance and accounting tools. As well as managing cash, improving budget forecasting and categorising spend, these companies are 31% more likely to be using this data to track and manage budgets, helping to redirect money to top business priorities. The study claims that these companies are 18%-34% more likely to report improvements in:

    • Budget visibility
    • Workforce productivity
    • Customer satisfaction
    • Speed of decision-making
    • Data sharing and collaboration
    • Employee trust in data
    • Simplified analytics

    According to the study, over a period of two years, best-in-class companies reported improvements of more than 26.1% in productivity and 24.3% in profitability. (Compared to -2.4% and -1.7% for others.) The data suggests that digital spend management really can help make the best spend decisions for your business.

    With uncertain times ahead, it’s worth having a read of the full report, which dives into detail about how digital spend and budget management has helped top companies thrive, with Aberdeen Research making recommendations for comprehensively managing company spend to achieve superior results.

  • Step 3: Bring everything together

    It’s time to pull your data together into one central database (or Excel sheet), listing all of your company spending. While this can be a slow and tedious process, it’s essential in establishing one source of trust, so you can accurately analyse your spend. There’s no fast-track alternative. Finding a tool or database that works with your payment methods is worthwhile, as you’ll always have up-to-date information when you need it.

  • Step 4: Time for a tidy up

    You might discover that certain data doesn’t look right, or uniform. This might be due to a mix of time zones, formats, currencies, languages, etc. For example, time zones can complicate spend analysis quite significantly. Checking spending month-to-month, you need to know when your business month begins and ends. The month doesn’t end at the exact same time in different countries. Set rules when compiling your data to avoid any confusion here, as it will mean your analysis is consistent every time you complete it.

  • Step 5: Categorise and group

    Categorising and grouping your spend data makes it easier to analyse. Tabs and columns can help to organise your categories, such as business team, supplier, spend category e.g. travel, agency fees and frequency (one-off, monthly, annual?). Plus any other key categories specific to your business.

  • Step 6: Analyse

    Now that your data is clean, categorised and accessible, it’s time to work out what it’s telling you. Your specific analysis will depend on your set goals, but let’s assume you’re looking for areas to be frugal. Some common areas to tighten your belt:

    • Redundant subscriptions
    • Upcoming renewals – review use before automatically renewing for another year
    • Prepare renewal negotiations with subscriptions you intend to keep
    • Large one-off payments can represent a significant percentage of your company’s These need to be highlighted in your spend analysis. Could it build a business case for more tax/compliance training to avoid another shock spend?
    • Miscellaneous ‘unnecessaries’. Whether it’s a certain brand of expensive tea bags or regular team lunches, it all adds

    Once your payments are categorised, you need to assess which percentage of total spending went into incidentals. If it’s looking high, it’s time to reassess and cut back. For example, you may be spending an unnecessarily high sum on your product postage and packaging; could the quality of the packaging be reviewed without detracting from the overall customer experience? This process will highlight potential trouble areas that need to be spotlighted in your spend report.

  • Step 7: Build your spend report

    As a small business owner, it might be only you that’s in the position to action these spending changes (or in conjunction with your accountant if you’re working with one). While it might only be you who currently views your report and takes action, building it is good practice, as it’s something that can later be shared with senior team members as your business starts to grow. It’s also a useful process to set up for the long term, and a useful document to outline the changes you’d like to see in the future.

What are the key areas where I need to evaluate my spending?

Whilst there are many areas where your business will be spending money, we’re going to look at the key areas where there can be room for significant movement:

  • Marketing
  • Growth plans
  • Office space
  • Third-party contracts
  • Staff 

Let’s go into a bit more detail…

Marketing

Marketing costs can make up a significant proportion of a business’s overall spend – and can be a good indication of a business’s ambition for growth and seizing opportunities. It’s a key area to evaluate your spending. 

  • Don’t go silent

    It’s a common reaction to tighten your marketing budget during times of uncertainty, as many consider this to be a non-essential cost. However, it’s important not to halt your marketing activity entirely, otherwise, you risk losing leads and new business opportunities. You even risk losing return customers by going silent, as you’re communicating a lack of stability. Your competition is also being given the opportunity to overshadow you.

  • Data-driven investments

    You can still be frugal with your marketing budget by making every penny count. This is where smart data insight comes in. Ensure your data is driving the structure of your marketing budget – how much you spend, where, and even when! Have an idea of the return on investment (ROI) per channel, while keeping a regular eye on your results to ensure you’re continuing to invest in what works, and quickly responding to areas that take a dip. For example, Google Analytics can tell you which of your marketing channels is most effective in driving traffic to your website.

    Throwing money at marketing isn’t going to guarantee results – a well-informed strategy that is monitored regularly will ensure you get the most value for your money.

  • Test, learn, refine

    Never stop testing, learning, and refining. While you might have built a successful marketing strategy through a test-and-refine approach, there are always new channels to explore and untapped customers to connect with. Be mindful of future-proofing your marketing strategy – something that might work for you now, might not remain as effective down the line. Trends and audiences can shift, new marketing channels emerge, algorithms are released, etc, so ensure you’ve got a hawk eye on your results as well as the latest innovations in technology that could be your next key marketing channel or tool. Invest in the channels that are working the best, but if you can, put some budget aside to test new opportunities also.

  • Be mindful with your messaging

    This will depend on the industry you’re in and the products/services you provide, but think about your audience and how the cost of living crisis is affecting them as well.

    • Is your offering considered a luxury?
    • Or are there aspects you could highlight in your marketing that connect with how your audience is feeling right now, and their priorities?
    • Can you solve a problem for them?
    • Do you need to consider pivoting your business offering (or part of it?) to meet customer demand (or lack of demand?)?

Scale back your growth plan

Reassess the timings of your business growth strategy: 

  • Do you need to pause new product development to ensure you can pay your essential business bills?
  • Hold back on your next hire?
  • Make-do with a piece of equipment for a bit longer before upgrading?

Consider remote working or a flexible co-working space

If your business can provide its services successfully via a working-from-home model, then remote working is worth strong consideration, as a huge proportion of your revenue can be saved this way. However, if you are still an advocate for the benefits of working in an office, especially if you have a team and business culture to consider and are prone to distractions at home, then flexible office space providers such as WeWork are a more economical, hybrid solution. This approach to office working will also provide a better safety net, should you run into financial difficulties in the future, as co-working spaces offer tenants greater flexibility.

Third-party contracts

As the cost of living soars, day-to-day tasks outsourced to third-party specialists – from SEO agencies to PR consultants – can commonly be considered as ‘unnecessary’ and cut accordingly. While this is a quick way to minimise costs, consider the impact they could have on your business in the long run, such as your new business pipeline. Additionally, it could also worsen the situation, impacting other small businesses like a domino effect. Spend analysis will help you avoid making knee-jerk decisions based on intuition and instead, help you focus your budget on the expenses that are having the biggest impact on your bottom line.

Review your staff

The cost of living crisis combined with an increase in National Insurance rates and the minimum wage, could mean that it is no longer feasible to maintain your current staff levels. Nobody wants to go down the redundancy route, so take time to assess your current structure, and whether a more frugal approach could be to reduce your staff’s hours. Tread carefully from a legal perspective – any changes to an employee’s contract must be agreed with them beforehand. Always get legal advice before reviewing decisions relating to staff.

There’s also the situation where you need to hire more staff, but can’t afford to. This is when it’s useful to reflect on your staff structure and productivity levels, and decide whether their roles could be better optimised to meet the needs of your business. Again, consult with a legal professional to ensure you’re following the correct process should any decisions affect contracts.

Don’t forget an emergency fund

Ensure you have an emergency fund, to help you weather any rough storms ahead. Every small business should have one, as it’s essential in bridging the gap between your business temporarily ceasing operations, and going out of business altogether. This fund can also help you pay the bills during times where you’re unable to cover your costs, whether it’s due to rising bills or being unable to offer your goods and services e.g. your premises are flooded, there’s a delay in your product arriving, and let’s not forget about the unprecedented impact of the COVID-19 pandemic. While this means you’ll have a little less money to put back into your business, an emergency fund offers many benefits such as security, being able to keep paying your bills, while also avoiding dipping into other crucial funds should an emergency arise.

Begin by determining how much you need to save – if your business was unable to operate for a month, how much working capital would be required to keep it (and you) going? Speak to an accountant or financial advisor about where you should keep your emergency fund – such as a savings account within your business bank account. As your funds grow, you might want to consider putting some of the funds into a money market account, which provides a larger return than a standard savings account. Again, this is advice you should seek from a finance professional. Then the last step is to begin depositing funds via a set schedule that fits you best – weekly? Bi-weekly? Monthly? Make a personal commitment with yourself to maintain these regular deposits for the sake of safeguarding your business.

What is the government doing to help?

The government will continue to support businesses with their energy bills with the Energy Bills Discount Scheme, this will run for 12 months and apply for consumption between 1 April 2023 and 31 March 2024.

All businesses and public sector organisations will be eligible for support with this scheme and the support will apply to any fixed contracts agreed on or after 1 December 2021, as well as to deemed, variable and flexible contracts.

Organisations will receive a £/MWh discount on their energy bills and do not need to take action to receive this universal level of support – the relevant price reduction will be applied automatically to bills.

Businesses will only be provided a discount when the wholesale prices go over a certain price threshold and there will be a limit to the level of discount a business can receive. Further details can be found via GOV.UK

Additionally, the government announced in its spring budget that it would increase Employment Allowance from £4,000 to £5,000 as a way to tackle rising inflation. Eligible businesses and charities will be able to claim a greater reduction on their secondary Class 1 National Insurance liabilities and, from the 2023 to 2024 tax year onwards, their Health and Social Care Levy liabilities. This is expected to benefit 50,000 small businesses. Fuel duty has also been cut by 5p per litre as a way to address rising petrol prices.

 

In summary, belt-tightening is of course necessary during challenging and uncertain times, but ensure you’re being frugal – as well as investing in the right areas to give your business the best chance of withstanding any future financial threats.