When concentrating on growth and realising their business vision, most entrepreneurs tend to focus on sales. But there comes a point where you will want to make your business as profitable as possible, either in advance of your exit, or because you want to reap the rewards of what you’ve built.
At this point, it is well worth looking at your cost base and considering where efficiencies can be made. This isn’t about being cheap or greedy: the fact is, costs tend to grow beyond all reason when you’re not paying attention, or when your primary aim is to secure and satisfy customers. At some point, you need to stop and take stock of that situation.
Cost control can be positive for growth
Even business owners who are focused primarily on growing their enterprise will benefit from an occasional bout of cost control. That is because the better your cash flow situation, the easier it will be to invest when you want to.
For a start, you will have ready money of your own to fund your growth with – and that is indubitably the best and cheapest way to do it. But you will also be much better placed to raise funds from banks and other business finance providers. Not only will you be more likely to get a business loan or bank overdraft for your business account, you will also have other options such as using the power of your accounts receivable to generate debtor funding – also known as invoice finance.
What’s more, as we saw when we considered the power of a 1% change a few months ago, a small cut to your cost base can have a surprisingly big effect on the bottom line – and that’s money you should be enjoying!
Five ways to cut costs in your business
When you decide to look at your cost base, here are five good areas to target, as they not only yield savings, but they tend to do so without any negative effects. In some cases, paying less will actually be better!
Go green. Obviously, being good to the environment is in everyone’s interest, and is no trivial matter. But waste costs money, too. A business can often save considerable amounts of money by becoming more environmentally friendly – and generate serious goodwill with staff and the local community into the bargain! Look at your use of energy, paper and travel: these areas are often ripe for cost control, with technology and the trend for greener solutions enabling serious savings.
Think about your borrowing. Most Australian SMEs have a business overdraft and maybe also a loan or two, either from a bank or an alternative business loan provider. Not only do you pay interest on these facilities, there are often a number of fixed charges too: charges for setting them up, closing them down, making changes or delaying payments, to name but a few… Perhaps it’s time to take stock and work out what your real cost of borrowing is, before comparing it to other funding solutions such as invoice financing or factoring.
Negotiate with suppliers. It’s not a case of turning the thumb screws – if you don’t like a practice when a buyer does it to you, then you can guess how your suppliers will feel about it. On the other hand, if your orders have been growing steadily, a new pricing structure may be in order. Another option that can work to everyone’s benefit is to pay your invoices early – many B2B operators happily offer a discount for doing this, because it helps with their cash flow situation and means they don’t have to seek finance. You’ll need a healthy cash flow to do this – invoice discounting can help.
Seek out inefficiencies and address them. Every businessman and woman knows that sometimes, you have to invest a little in order to save money. If you have ageing plant, inefficient vehicles or bottlenecks on your production line, consider replacing the equipment. In particular, look out for inefficiencies that have a knock-effect on staff time: workers standing idle are a serious drain on resources.
Encourage a cost-saving culture. Once you’ve addressed all of the above, it might be time to bring in a fresh pair of eyes – or many pairs. Why not offer a prize or reward for cost-cutting suggestions from staff – or at least canvass managers for their ideas. Everyone is an expert in their own particular niche, and they usually appreciate the boss seeking their opinions.
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