Is Your Business Cutting the Right Costs? Here’s How to Know
Your cash flow is the lifeline of your business. As a small business owner, your goal is to steer your business towards profits and avoid losses as much as possible. Having a positive cash flow means the possibility of further growth or realizing profits. Adversely, a negative cash flow indicates the business might be in trouble.
The formula for cash flow is simple: Positive cash flow means you’re earning more than you’re spending, while a negative cash flow reflects that your expenses exceed your revenues. In the case of the latter, you need to evaluate where and how you’ll raise additional capital to steer your cash flow in the right direction, and where you can cut costs. After all, there are many factors affecting revenues that are beyond your control, but you can undoubtedly control your expenses.
Here are some expenses you may want to think about reducing or eliminating to free up some much-needed cash.
If you or your accountant takes a fine-tooth comb to your expenses, there’s a good chance you’ll find that your lease terms are siphoning a lot of money from your cash flow. It’s all good when your sales figures are thriving, but your monthly lease can put a red mark on your ledgers if revenues are not enough to support it.
It’s a tricky cost to cut because leases are typically long-term affairs. However, you can notify your landlord of your financial situation and try to renegotiate the terms. We’d recommend retaining a lawyer to help you with such negotiations and to make sure you’re not accidentally violating any terms of your agreement. It’s also essential to have your financial statements ready to plead your case before your landlord.
Your employees’ happiness is certainly a top priority, but you can’t have staff perks taking precedent over your ability to pay them. Things like a free gym membership or performance-rewarding gift certificates can take a toll if you’re not earning enough to support them. It may be time to evaluate what perks you’re currently offering and identify which can be and need to be temporarily suspended.
Government-mandated benefits like health insurance should never be cut back on. If you’re really in a tight spot, you could choose to lower the contribution ratio for benefits like 401(k) plans (meaning the employee pays more for the plan than the business), but hopefully, there are other steps you can take before this one.
When it comes to expenses directly impacting your employees, always be transparent. Communicate with them face-to-face and explain the situation you’re in. More often than not, your employees will understand if you’re honest and upfront about the predicament the business is facing.
With more and more people working from home, take the time to evaluate your office supply needs. Perhaps you can make significant cutbacks in this area. If not, shop around for better deals from suppliers and be sure to buy in bulk. When it comes to suppliers, stick with wholesalers, as opposed to retailers, as they can offer lower bulk prices which will help you save more in the long run.
Do as much as you can to go digital as this will also cut back on certain supply needs. For instance, sending your customers digital receipts and offering them the ability to pay using digital wallets allows you to cut back on paper consumption costs.
Marketing is essential but costly. Thanks to the Internet, however, you have more cost-effective methods to use as an alternative to traditional advertising. Social media marketing can be virtually free of charge, especially if you do the marketing yourself instead of hiring someone to do it.
You will need to spend money if you run Sponsored Ads, but even these ads can be cheaper than TV or radio ads. Both Facebook and Google ads can be very cost-effective, and these campaigns can be customized to fit your budget and goals.
Another way to save money on marketing is to leverage your network. It’s more effective to network with potential clients than to run ads. It’s also less costly. Plus, the personal nature of the interaction helps to build trust, and trust is essential to successfully closing a negotiation with a client or customer. In some industries, even competitors refer clients to one another, but that’s only possible if there’s a positive relationship.
Finally, you can try launching a referral program. This brings your customers into your advertising campaign, and they’ll advertise your products or services for you at a minimal charge. There’s nothing more effective than incentivizing your existing customers to bring you more sales.
Which of the Following Is Not One of the More Commonly Used Options for Cutting Project Costs?
You rarely hear a small business owner say that he or she has cut costs on paper supplies for the office. It’s easy to take the expenses on bond paper for granted since it’s still an essential part of any business. However, entrepreneurs may not notice that they have already lost a lot of money on paper and other office supplies. This is something to look out for as a business owner because there are always deals on office supplies that can help the business cut costs.
Are You Cutting the Right Costs?
These are but four of the expenses you could cut back on if you’re looking to decrease your overhead. With these expenses successfully cut or reduced, you should start seeing more cash flowing into your business. It should help you break even, at the very least, so you can secure your financial health while you wait for your income to improve.
Cost-cutting is a vital skill to master for a small business owner. Mastering the skill early on will equip you with the tools you’ll need to manage your finances when the business has grown significantly. When you know which expenses to cut back on or eliminate, recovering from a setback in the future becomes more manageable.