Cost Reduction or revenue increase?
Cost reduction or revenue increase? How to improve your cash flow in today’s climate
Poor cash flow is the main reason businesses fail within their first year of trading and there is no real “quick fix” remedy. The trick is to recognise the factors that are responsible for this and try to avoid them through good business practice.
Firstly, don’t panic. Making a stress based decision on cutting costs by axing your sales representative or chopping your advertising budget in half isn’t going to save you. Neither is a sudden loan injection to boost your marketing activity in the hope that leads may convert in time to yield cash.
Cash flow is the movement of money within your business, meaning both the money going out as well as that coming in. Sometimes we’re just too busy watching what’s coming in.
Some of the most obvious things to watch out for:
Over financing
Over Trading
Too many debtors
Too many creditors
Over Investing
Holding too much stock
Market demand changes
Over financing from start up means trouble for the near future as the perception is that you had more than enough money but, being excited about your new venture, you’ll have spent that quite quickly on set up costs, offices, stationery, mobile phone, stock, website and other services you felt you needed and, over a very short space of time, that cash will have dwindled rapidly and it wasn’t yours to begin with. You have to pay it back.
Feeling the pinch, you increase sales activity and end up over trading by selling more than you are capable of with your current cash levels and what’s worse you’ve enticed customers by offering credit facilities which means you don’t see your money for 30 – 90 days and some of those will default costing you legal and recovery fees on top of the interest you owe already, having a major impact on your cash flow.
Meanwhile your loan and higher interest rates kick in along with tighter repayment schedules which in turn lead to you having less control of your business and, if you used your home as security puts your family at risk too. All this combined with a sudden change in demand – as happens during recession – is lethal for a small business.
If you recognise one or more of these danger signals take time out to implement a clear management strategy giving you direction in terms of sales, cost and stock control and market demand changes.
o Analyse your costs historically and draw up a forecast budget to guide you.
o Cut excess spending carefully and decisively
o Luxury items such as cars, mobiles, offices, furnishings, expenses are all areas where changes can be implemented immediately
o Review your credit agreements with customers and tighten up on payment terms and collection.
o Manage your suppliers smarter i.e. pay on time to reduce costs and maintain a good credit history
o Relook your stock control systems. Overstocking costs you capital and storage.
o Marketing activity can be re-aligned and more cost effective marketing strategies implemented such as ‘seeding’ online or networking.
o Talk to your website manager about optimising your site to attract more prospects
o Remember the basics.
Don’t be afraid to involve an expert such as your accountant or marketing consultant. If they’re any good they’ll offer strong advice and help you implement the changes in a cost effective manner, ensuring you stay in business. Although this is an additional cost it will save you money and perhaps, even your home in the long run.
This article is sponsored by GreyMen Accountancy and Administrative services, Witney.
Anco van Velsen
Jane van Velsen - The Right Writer
