So you've written a brilliant financial forecast and are feeling confident about your startup costs - congratulations! But looking at your financials with a critical (and open) eye doesn't stop there. It's important to ensure that as you get on with running your business that your costs don't creep up.
"It’s cashflow, not profits, that make or break businesses," explains Jason Smith, a blogger and energy expert who has helped businesses increase their energy efficiency for over 10 years. "Even if you make a healthy margin, if you run out of cash, you can’t pay your bills."
Jason manages the website Business Electricity Prices, which advises small- and medium-sized businesses on reducing their utility bills. Here are his tips to help you efficiently manage your costs beyond the business plan.
Using your business plan
Before cost management is even discussed, you should be actively running your accounts using the business plan that made your company start in the first place. Even the most basic of spreadsheets listing monthly sales, margins and fixed and variable costs shows the cash coming into the business and the expenses being paid.
It need not take much time to update the data, and your accounts package can help forecast the next 12 months. Once you have an idea of your financial position, you’ll know what level of potential change needed to keep you on track to hit your profit and cash targets.
If you don’t yet have a financial plan or the one you have is out of date, it’s recommended you spend a few hours developing one before you tackle your cost position.
Deciding what costs to investigate
Lowering bills is the main aim here, and with time being of limited supply, we have two tips to help decide where to invest your energies. If you can’t spend the time to go through each and every cost line or supplier, then split your efforts into two broad categories:
- Your largest costs
- Those that take the least time to manage
The highest costs in your business may take the most effort, but if you can reduce or maintain them while your sales increase, it has the biggest impact on profits and cash flow.
Those that take the least time may also provide the minimal returns, but at least you’ll make progress and save some money as well.
Tackling the biggest costs in your business
Most small businesses have three main types of costs when starting up and growing:
- Raw material or product cost
- Staff wages and salaries
- Rent and associated expenses
You may look at those and think straight away that you can’t possibly reduce those, but the lesson here is about management over the medium term. Let’s take each in turn.
Raw materials and poduct costs
Most businesses that resell products, such as convenience stores, and those that change a material to something else, like restaurants or manufactures, may believe their costs are relatively fixed in nature. However, work can be undertaken in different areas.
For example, you could:
- Renegotiate payment terms to improve cash flow
- Check other suppliers for similar products
- Negotiate lower costs if your purchase volume increases
- Ask for discounts when you hit a certain spend
If you’re tied into a supplier, there’s still usually room for manoeuvre, as other businesses are surely receiving better rates than yourself. If your existing supplier still says no to a reduction in price, ask them what it would take to get a discount. You may be surprised what they have to offer.
Staff wages and salaries
One of the biggest costs—and the most important element—of successful businesses is their people. It’s unlikely to be something that can be reduced, but certainly one that can be managed. And it’s just one of the costs that Darren Craig highlights when building realistic forecasts.
If you have a high turnover of staff, then it’s best to try and reduce this to save time and money on recruitment. It takes time to train a new member, which is time you may not have in abundance.
If you’re thinking of employing additional people, can you hold off for a few more months? The step-up costs of a new hire will impact your profitability and cash flow. Also consider whether you could you get more out of the staff you already have. Maybe train them do perform additional duties rather than be specialists. They can then cover for people that are on holiday or off sick. You may then also save on temporary staff.
Rent and associated expenses
Rent is also seen as something that’s non-negotiable, but in my experience, everything is negotiable! You could extend your term on lower payments, ask for a rent-free period upfront or totally renegotiate the lease.
Tackling costs that take minutes to save money
Other monthly expenses such as electricity, gas, insurance and water should be checked at least once per year using one of the many comparison sites. All of these costs will increase each year without question if you stay loyal to your current provider - and you can reduce all of them each year by switching.
The time taken is perhaps 10 minutes per utility, but the savings mount up. Energy bills could reduce by 40% to 50% if you haven’t switched in the past year, while insurance should not increase if you haven’t made any claims.
Your return on your time investment (ROTI) is immense. A medium-sized small business with an annual bill of £3,800 could save £1,300 or more from 10 minutes of completing an online form. These savings are real, and we see them each and every day.
Updating your plan
Once you’ve looked at ways to either save money or keep your costs flat over the medium-term, you should update your forecast in your business plan. You’ll then see the impact of the changes you’ve made to your bottom line and cash flow requirements.
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