Cash is king. You might hear this saying a lot as a business owner… because it’s true.
Cash is how you keep the lights on – quite literally. It’s how you pay staff, buy stock, grow, thrive and achieve your goals.
There are lots of different factors that impact cash flow. A business that’s perfectly healthy in other aspects can fail due to poor cash flow. It’s a critical feature of a healthy business, and one way to boost it is to cut your expenses.
Expenses are a necessary evil in any business, so how do you know what expenses you can afford to do without?
Reducing expenses is one of the quickest ways to improve cash flow in your business. By looking for ways to become more efficient and cut unnecessary costs, you’ll be more able to pay bills and more profitable. It pays to get under the hood and understand the full impact of cost-saving measures on your business.
What is cash flow?
Cash flow refers to money that comes in and goes out of your business. Your incomings are the ways you make money, and outgoings are all the things you pay for to make it happen – wages, fuel, purchasing stock, electricity etc.
Healthy cash flow means a business has a steady stream of income that can cover outgoings. In quiet periods, it may mean deliberately boosting cash flow, such as with cash flow finance.
Read more: Understanding a cash flow loan
The thing is, there are often a lot of types of outgoings and only one or two types of income. This is what makes cash flow management so crucial – one problem with income can create a lot of pressure.
Why is cash flow important to a business?
Cash flow is more than just profit or revenue – it’s about having money on hand when you need it. All businesses have expenses and overheads, and if they don’t have the cash flow to pay for them, they’ll have to dig into their cash reserves.
As we’ve touched on, while expenses aren’t things businesses want to be paying, they’re necessary – rent secures a premises, wages mean you have staff, utility bills pay for power and internet… all the necessities of being in business need to be covered by the money the business has.
Small businesses in particular operate on thin margins, and often don’t have big bank balances. It’s perhaps for this reason that more than 80% of businesses that fail cite cash flow issues as being the main factor.
It’s also important to differentiate income between income that’s realised and income that isn’t. Businesses that invoice customers often have to wait up to 30 days or more to realise income.
Overheads that are due in that time need to be covered using cash or other means. While having accounts receivable is a good thing for future income, cash flow deals with money that’s in the business right now.
Take a look at your business financial standings
When looking at your business’ cash flow, the more you know, the better. It pays to get under the hood to see exactly where your money is sitting, where it’s coming from and where it’s going.
The more you understand your finances, the more control you have – you can control your leaks, ramp up your income or find other ways to boost your company’s cash flow.
In terms of your cash flow, there are three key metrics to look at:
As we’ve mentioned, cash is king. Money is the only thing you have that enables you to pay bills and overheads. It doesn’t matter how much money you’re owed, you need money in the bank for good cash flow.
It pays to know how long you can stay in business with the current levels of cash you have. If your business stopped trading today, how long could you stay in business for?
Read more: Invoice cash flow tips for businesses
Understanding how much runway your business has enables you to make good cash flow decisions. For example, you may not go out and purchase new equipment if you know you also have wages to pay this week.
Retail businesses and those that trade by selling stock often have a lot of money tied up in stock. While stock is what generates profit, it doesn’t generate anything until it’s sold.
Keep an eye on both slow moving and fast moving stock.
- Slow moving stock isn’t adding to the business and it may be worth finding ways to liquidate it after a period of time
- Fast moving stock generates positive cash flow. You may be able to find ways to sell more of it, particularly in quieter periods.
Debts are payments obligations, and as such create negative cash flow pressure. When forecasting cash flow, knowing how much money you need to pay back and when gives you an understanding of upcoming outgoings that you need to be able to cover.
Effective tips to boost cash flow and reduce expenses
If cutting expenses was easy, everyone would do it. Boosting cash flow by reducing expenses is about finding what the minimal level of expense is that allows you to remain as profitable as possible.
These are some of the quick ways to boost cash flow and reduce expenses.
Cut overhead waste
Look for things you’re paying for and not using. Subscriptions are often a good place to start, whether it’s for software, app or trade publications, if these things aren’t being utilised to generate income then it may be time to cancel them.
Look at overheads as investments – they should enable you to generate more money than what you spend on them. If you’re just spending money on things that don’t provide a return, that’s a great place to start cutting back.
Audit your supplier agreements
It can be hard to know if you’re getting a fair market rate from your supplier, but it’s worth looking into. Do your research into if your price is fair or not, and if you decide to try for a lower rate, long term suppliers who have more reliance on your business are a good place to start.
Negotiating a cheaper price is often difficult, as suppliers won’t want to accept less money. That’s not an excuse not to try, but if that’s not possible, you may be able to secure an early payment discount that relieves business cash flow pressure.
Paying bills doesn’t help cash flow, but if you’re in payment cycles then it’ll make things easier when it comes to the next bill.
Negotiate your payment terms
If you can’t negotiate better rates, you may be able to secure longer payment terms that lead to better company cash flow. Start out by trying for a cheaper price, but if that doesn’t work, settling for more lenient terms is still a win!
At the same time, you can check your own payment terms and arrange payment on the day bills and invoices are due. Unless there’s an early payment discount, paying early has no benefit and just puts pressure on cash flow in other areas.
Restructure your organisation
Assess the makeup of your business and look for efficiencies within the structure you have. Ask yourself, is your current business structure efficient? Does it allow you to maximise the money you make from your strengths, and is there a better structure to reduce waste?
Customer needs change regularly and new skills can emerge that you may need to bring on board. Just be aware that restructuring can take many months, and isn’t likely to be a quick cash flow solution.
Consider virtual workforce
Remote work has become much easier in recent years, and is a great way for businesses to save money on things like office space, furniture and utilities. If there is a desire among your staff to work remotely, and it won’t impact the business’ profitability, then it’s worth encouraging.
Read more: Overcome barriers to positive cash flow
Not only that, but being open to staff that work from home enables businesses to get access to a larger talent pool of people who aren’t just based in your location.
Transition to e-commerce instead of brick and mortar
Similar to the virtual workforce, retail stores can drastically reduce overheads by turning to e-commerce.
Online marketplaces are becoming more and more popular among shoppers, and are much more scalable than brick and mortar stores; they can grow at a rate that’s proportionately greater than the time and money you invest in them.
Having an online store doesn’t mean turning your back on the shop you have – there’s no reason why retailers can’t have an e-commerce platform as well as a brick and mortar store.
Explore outsourcing options
Outsourcing functions or responsibilities is a good way to reduce costs for tasks that have some flexibility in them.
For example, rather than having a full time assistant, you can hire a virtual assistant to work as needed. A marketing agency may be more efficient than having a full time in-house department.
Take a look at your options and see how it impacts your bottom line.
Take home message
There are only two ways to improve business cash flow – sell more or save more.
While there are definitely levers you can pull to increase your income, these can take time before they have the desired effect. Cutting expenses is often a quicker way to improve cash flow.
All business owners try to keep expenses down, but conducting a thorough audit of your outgoings is a good way to identify where you can do better.
There’s nothing wrong with testing different approaches either. Cutting an expense may end up impacting the business in ways you didn’t predict, and if this happens you can always change things back. Don’t be afraid to test the impact of cost-saving strategies before settling on a permanent solution.
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