Managing Business Expenses When Cash Gets Tight
Most businesses experience tough times now and again. While the best answer for increasing profitability is usually to boost sales, sometimes you get to a point where you feel you can’t increase sales any more. Your only choice may be to grab a sharp scalpel and start cutting expenses.
Get your most recent Profit & Loss report for the last 12 months, grab a highlighter pen, and circle your top six expense accounts. Ask yourself, how much would you save if you cut each of these expense accounts by 10 per cent? (Do the sums — you may be pleasantly surprised!)
The largest expense account for most businesses is wages. Finding savings in your wages bill can be tough emotionally, especially if you’re looking at cutting the hours of loyal and hardworking staff. However, sometimes you need to make hard decisions in order for your business to survive, and keep employing anybody at all. Ask yourself these questions:
Can you see any way you can make your business more efficient and save staff time? Maybe you could implement new systems, train staff in using software better, process more information online or replace face-to-face sales with telemarketing.
Can you cut staff hours and still get the same work done? Some staff may welcome a reduction in hours, maybe leaving early a couple of days per week. Even if you can’t negotiate a reduction in someone’s total weekly pay, you may be able to offer additional time off instead of a pay rise, a solution that works well if minimum wages are due to increase.
Look at the peaks and troughs of your business. Do you employ full-time staff who have prolonged quiet periods at certain times of year? If so, you may be better substituting at least one or two full-timers with casual staff or subcontractors.
Do any of your staff spend time doing work that they’re over-qualified for? Could you replace some of this staff time with a junior employee?
When did you last review your systems? If your business has been in operation for more than five years, chances are you could streamline your bookkeeping and financial systems (and save on staff time) by using new technology such as cloud accounting software, bank feeds and electronic payments.
The other major outgoing for many businesses is the cost of things you buy to resell, or cost of materials for manufacture. For retailers, wholesalers and manufacturers, a reduction in cost of sales or raw materials of as little as 2 or 3 per cent can make a big impact. Negotiate hard with suppliers for better pricing, and be prepared to jump ship if another supplier offers a more competitive deal.
For all other key expenses, generate a report that lists every transaction for the last 12 months. Read these reports line by line and ask yourself, was every single payment completely necessary?
You can sometimes find reductions in expenses where at first you feel you have little flexibility. For example, maybe in the past you’ve thought of rent as being a fixed amount that isn’t open to negotiation. However, try to think outside the box. Is there any space you could sublet? Could you approach your landlord and ask for a 12-month reduction? (The worst that can happen, assuming you have a lease in place, is that the landlord says no.) Is it worth looking for alternative premises?
The good news is this: Even if you feel you already run a very tight ship, chances are you can still find ways to reduce expenses, create some breathing space, and generate that extra bit of profit.