Many CEOs I speak with are concerned about the economy. They want to be proactive in keeping their cash flow healthy and their profits from declining. Flagging growth, surging inflation, and central bank tightening are all indicators of a potential recession coming. Regardless of your outlook, it seems the headwinds facing the global economy are blowing with full force.
There are two main variables that will help your business stay afloat during a tough economic season: the revenue you have going in and the expenses you have going out. If you can retain control of these two variables, your business can continue operating successfully and have a healthy flow of cash. To manage risk, it may be prudent to preserve cash until more encouraging signs emerge.
My last article provided many strategies to improve cash flow by establishing strategic price increases. Another approach to improve your company’s cash flow is to monitor your expenses. Especially in today’s current inflationary economy, chances are your business is experiencing price hikes from your suppliers and vendors, and an increase in the wages to your staff. This increase can be a drain on your cash flow. Being diligent in evaluating your company’s expenses, measuring the true value of each expense, and operating leaner is some areas, without sacrificing quality, can help improve your cash flow position.
Focusing on the “expense” side of the cash flow equation.
These tips should allow you to budget for expenses more accurately, and ultimately reduce your operating costs. If you can do this consistently, you can improve cash flow month over month:
Reducing expenses. Every dollar you save on expenses (while maintaining the same standards and operations) is an extra dollar of profit.
Budget and Forecast expenses. Business Owners also need to understand what your expenses are and how they work.
-> Fixed expected expenses: Expenses that come at regular intervals (weekly, monthly, annually, etc.). Examples can include building rent, insurance premiums, equipment leases and payroll.
-> Variable expected expenses: Expenses that come at regular intervals but can vary are called “variable.” Examples can include utilities, phone bills, employee training, bonuses, marketing and advertising.
-> Variable unexpected expenses: Otherwise known as “emergency expenses,” For example, no one plans for a major piece of equipment to fail or their biggest client to jump ship.
Recurring expenses: Recurring costs are those monthly fees, that sometimes can take a big bite out of the bottom line. Are you paying for any subscription services? Does your company use unnecessary vehicle or transport services? Do you work with a vendor that could be cut out? Recurring costs are often the best place to start analyzing where you can save money month over month.
Strategically taking on major business expenses. Managing expenses means taking on other expenses, provided they’re valuable to you. For example, you might invest more money in a new marketing campaign if it promises to return new sales.
Time to Reevaluate Your Operating Expenses
Take a careful look at your cash flow statement and analyze your company’s business expenses. Ask yourself these two questions:
- Are these expenses necessary?
- If they are necessary, is there a more economical alternative?
Cut out any expenses that are unnecessary and try to minimize the necessary expenses as much as you can. It may seem difficult to do, but you will feel much better knowing that you’re managing your cash flow and expenses effectively.
Streamline Your Business Processes
Another important aspect of managing your cash flow is making sure your business is running as efficiently as possible. Focus on cutting time, not just costs. Analyze all of your current business processes and judge how efficient the current process is to see if there’s any way to speed up that process.
Maybe that means implementing accounting software to send invoices faster or rethinking your employees’ inventory assembly process. By using time efficiently, you can get more done, spend less on wages, and avoid excessive overtime pay (which can put a huge dent in your business’s cash flow). If you have vendors or costly monthly software you use, consider re-negotiation, changes in vendor payment terms, or outsourcing certain services to create a more effective and profitable cost structure for your business.
Purchase More Effective Equipment
One way to increase your company’s speed and efficiency is to purchase better, updated technology and equipment. While it may cost a bit to purchase the equipment initially, you will save time, which cuts back on wage expenses. This may also lead to increased production or the ability to take on extra projects, leading to more incoming cash.
Consider Leasing
With leasing, you have access to the equipment for the life of the lease. For example, if your lease is for five years, you have access to and can use the equipment for five years until your lease contract expires.
In some cases, you may be able to purchase the equipment at the end of the lease depending on what is in your contract. Leasing can be a good option if you want to conserve cash. Not to mention, it can be a good option if you need equipment quickly and don’t want to pay for expensive equipment.
Outsource Talent and Expertise
If you have full time employees, you understand that you are required to pay your employees even if they don’t have much work to do at the moment. You also have to spend money on payroll taxes and employment benefits such as medical insurance, travel allowance, and retirement plans. Many businesses seek to maximize their profits by limiting how much they spend on overhead costs. One way to lower overhead is by outsourcing certain business functions. It could be an occasional task, such as preparing taxes once a year, or a routine part of business operations such as an outsourced marketing firm or fractional CFO. One of the chief advantages of outsourcing personnel is immediate access to a diverse, experienced and skilled professional in the field you are outsourcing. You pay for the time and service provided.
Outsourcing can also lower your overhead costs. Sometimes the expense of purchasing equipment or needing a new location can be prohibitive. In these cases, it’s more cost-effective to outsource than to expand operations internally. If the growth of your business results in an increased need for office space, try outsourcing simple operations such as telemarketing or data entry rather than moving to a new location. It might cost far less than the price of expanding, and it is both more efficient and less expensive than relocating.
Hire a Fractional CFO
If you’re still looking for ways to cut costs, consider working with a fractional CFO, like Norris CFO. We will provide you with a thorough review of your company’s expenses, see where there is room to reduce costs, renegotiate terms and evaluate your spending and overall costs. By reducing unnecessary costs, you can allocate those funds to where it’s truly needed and further work towards improving cash flow during today’s economy.
To learn more visit NorrisCFO.com or email [email protected]