Effective cost control measures are crucial to cash flow for running a survivable business at any time – but even more so during periods of economic uncertainty.
Organizing your finances could make the difference in seeing your business thrive in 2021. Here’s how to get started.
1. IDENTIFY YOUR MAJOR COST CENTERS
Although you probably have a rough idea of your business costs, understanding exactly where your biggest expenses lie is an important first step in cost management. Review your main cost centers, including:
employee wages and benefits
equipment and vehicles
products and materials
marketing and advertising
insurance and other professional fees
business loans and debts
other overhead costs such as repairs and maintenance.
Make sure you have a clear picture of how much you’re spending in each category over a specific period, such as the last quarter. Some expenses may be seasonal, so it’s also a good idea to look at how these costs vary during different times of the year.
2. UPDATE BUSINESS FINANCE STATEMENTS
Financial statements provide valuable information about how your costs are impacting the financial health of your business. To help you assess your business costs, consult your bookkeeper, or if you’d like to take control, now may be a good time to invest in an accounting software program. At a minimum, you need to be able to produce:
A profit and loss (P&L) statement: this summarizes your revenue and expenses over a period. It’s useful for seeing how business costs are impacting your profit margin.
A cash flow forecast: this provides an estimate of how much money will be flowing in and out of your business over a future period, such as a month or quarter. Cash flow statements help you to assess how your upcoming expenses will impact your cash flow.
3. SORT THE ‘GOOD’ COSTS FROM THE ‘BAD’
Although it’s good practice to keep overheads low, some expenses are essential for long-term growth. Before you start looking at ways to slash costs, consider which areas help drive revenue and profitability for your business, and which are more likely to drain your resources.
For example, if your employees work remotely, rent and utilities might now be considered ‘bad’ costs because they’re no longer contributing to your bottom line.
On the other hand, marketing and advertising expenses that help grow your customer base might be considered ‘good’ costs.
Sorting the ‘good’ expenses from the ‘bad’ can help you identify which areas to target when it comes to cost-cutting.
4. LOOK FOR WAYS TO REDUCE EXPENSES
Once you’ve worked out the difference between helpful and harmful costs, consider how you can consolidate or reduce your ongoing expenses. This could include:
negotiating new terms with your landlord or suppliers
switching utility providers, banks or insurance companies to get a better deal
reducing stock levels and warehousing costs
reducing payroll costs by changing shift patterns
cancelling subscriptions you no longer need
automating business processes using technology
refinancing business loans
reducing discretionary spending such as entertainment costs.
Focus on cost-saving in areas where you’re most likely to see the smallest impact on your essential operational activities.
5. DETERMINE YOUR FINANCIAL GOALS
If one of your goals is to grow your profit, it’s important to forecast costs and opportunities to ensure your growth is sustainable. For example:
Cafes and restaurants looking to expand operations with mobile coffee carts or food trucks: costs may include an additional vehicle and it’s running costs, commercial hospitality equipment, insurance and permits.
Web designer looking to win more work from existing clients: costs may include hiring freelance support staff, automating or outsourcing tasks such as bookkeeping and invoicing to free up time for meeting with clients.
6. IDENTIFY THE FUNDING YOU NEED
Do you have the means to comfortably grow or sustain your business? We are fortunate to have both government and private business grants available to help support Australian businesses. Many are state or territory-specific and apply to different business stages including small business grants and startups, categories and industries.
Eligibility criteria and application periods vary but if successful a cash injection can make the difference to the future of your business and the Australian economy.
7. RECONCILE: BUSINESS PLANS VS LIFE GOALS
Running a business can consume a great deal of your life. Weighing up profitability and the time you personally invest in your business is an ongoing equation to balance.
If you want to step back from the day-to-day in your business, consider what the biggest time overheads are and the possible solutions. You might be surprised at how a small investment can recoup a lot of time back in your day.