Effective cost control measures are crucial to cash flow for running a sustainable business at any time, especially during periods of economic uncertainty.
Rethinking your cost management strategy could make the difference in seeing your business thrive in 2021. Here’s how to get started.
1. Identify your major cost centres
Although you probably have a rough idea of your business costs, understanding exactly where your biggest expenses lie is an important first step in cost management. Review your main cost centres, including:
employee wages and benefits
equipment and vehicles
products and materials
marketing and advertising
insurance and other professional fees
business loans and debts
other overhead costs such as repairs and maintenance.
Make sure you have a clear picture of how much you’re spending in each category over a specific period, such as the last quarter. Some expenses may be seasonal, so it’s also a good idea to look at how these costs vary during different times of the year.
2. Update business finance statements
Financial statements provide valuable information about how your costs are impacting the financial health of your business. To help you assess your business costs, consult your bookkeeper or if you’d like to take control, now may be a good time to invest in an accounting software program. At a minimum, you need to be able to produce:
A profit and loss (P&L) statement: this summarises your revenue and expenses over a period. It’s useful for seeing how business costs are impacting your profit margin.
Acash flow forecast: this provides an estimate of how much money will be flowing in and out of your business over a future period, such as a month or quarter. Cash flow statements help you to assess how your upcoming expenses will impact your cash flow.
3. Sort the ‘good’ costs from the ‘bad’
Although it’s good practice to keep overheads low, some expenses are essential for long-term growth. Before you start looking at ways to slash costs, consider which areas help drive revenue and profitability for your business, and which are more likely to drain your resources.
For example, if your employees work remotely, rent and utilities might now be considered ‘bad’ costs because they’re no longer contributing to your bottom line.
On the other hand, marketing and advertising expenses that help grow your customer base might be considered ‘good’ costs.
Sorting the ‘good’ expenses from the ‘bad’ can help you identify which areas to target when it comes to cost-cutting.
4. Look for ways to reduce expenses
Once you’ve worked out the difference between helpful and harmful costs, consider how you can consolidate or reduce your ongoing expenses. This could include:
negotiating new terms with your landlord or suppliers
switching energy providers, banks or insurance companies to get a better deal
reducing stock levels and warehousing costs
reducing payroll costs by changing shift patterns
cancelling subscriptions you no longer need
automating business processes using technology
refinancing business loans
reducing discretionary spending such as entertainment costs.
Focus on cost-saving in areas where you’re most likely to see the smallest impact on your essential operational activities.
5. Determine your financial goals
If one of your goals is to grow your profit, it’s important to forecast costs and opportunities to ensure your growth is sustainable. For example:
Landscaping or pool building businesses looking to diversify into outdoor pizza ovens: costs may include additional equipment, upskilling and training employees, updating your website and investing in some initial marketing and advertising.
Cafes and restaurants looking to expand operations with mobile coffee carts or food trucks: costs may include an additional vehicle and it’s running costs, commercial hospitality equipment, insurance and permits.
Web designer looking to win more work from existing clients: costs may include hiring freelance support staff, automating or outsourcing tasks such as bookkeeping and invoicing to free up time for meeting with clients.
6. Identify the funding you need
Do you have the means to comfortably grow or sustain your business? We are fortunate to have both government and private business grants available to help support Australian businesses. Many are state or territory-specific and apply to different business stages including small business grants and startups, categories and industries.
Eligibility criteria and application periods vary but if successful a cash injection can make the difference to the future of your business and the Australian economy.
7. Reconcile: business plans vs life goals
Running a small business can consume a great deal of your life. Weighing up profitability and the time you personally invest in your business is an ongoing equation to balance.
If you want to step back from the day-to-day in your business, consider what the biggest time overheads are and the possible solutions. You might be surprised at how a small investment can recoup a lot of time back in your day.
Enhancing your website with clearer product information, FAQs or even a chatbot will reduce non-sales oriented phone calls.
Marketing and advertising
Working with a professional marketing agency can help ensure that your advertising is both cost-effective and efficient. You can then apply data and insights to make informed decisions about how you spend your marketing budget.
If you haven’t already, make the call whether to bring on a bookkeeper or invest in some accounting software and automated invoicing.
Payroll and HR
Managing employee paperwork can be a headache and it’s an important item to keep on top of to protect yourself legally and ensure you’re getting the most out of your employees. Considering a cloud-based solution that integrates with your accounting software is an affordable way to remain compliant.
Notch Above Bookkeeping are Platinum Certified Xero bookkeepers and BAS Agents. We help small business owners across Australia (especially medical specialists such as dentists, orthodontists, optometrists and anaesthetists) to prepare BAS returns and streamline their bookkeeping processes, payroll and accounting records using cloud technology.