5 Tips For Cutting Cost and Improving Profitability

Man with Calculator and the cost of Living
Man with Calculator and the cost of Living

Cash flow represents the amount of money coming into your company and the amount of money going out. It’s extremely important for small businesses.

Cash inflow is the core of your company and comes from different sources – payments from customers, interest on savings or investments, receipt of a loan, monetary infusion from an investor, etc. Cash is very important because you will need it to pay for things that make your business run such as expenses like stock or raw materials, employees, rent and other operating expenses.

Naturally, positive cash flow is recommended because it means that your company is running smoothly. If you manage to have high positive cash flow, you will be able to make new investments (hire employees, open another location). That is the only way if you want your business to grow.

All you have to do is to avoid negative cash flow. Here are 5 ways that might help you with that:

  1. Implement a spend policy

Companies often use the spend policy to provide guidelines on how to spend and what to spend on.

You should also think about including purchase approvals in your spending policy. In order to do that, you will need to involve your employees to make request for purchase approval and forward it by email to somebody with authority to approve it or this can be automated by using an E-procurement system.

Besides purchase approvals, you should also include Travel and Expense (T&E) reimbursement policy. The policy should provide guidelines on what is reimbursable and what is not reimbursable.

  1. Get Better visibility into your spend

If you run the small business and want to reduce your spend, you should focus on getting better visibility into your spend. That will help you not just with understanding where you are spending money but it also with identifying opportunities for cutting spend (cost avoidance) or opportunities where you can get better price for the same product or service (Cost savings).

A very basic spend analysis should answer questions like where your company is spending money (Product/Services), with whom (Suppliers) we are spending and who is spending(Individual/Departments). You can categorize your spend into different categories (For example Office supplies, Information Technology).

At the end, you should assess your monthly expenses. This step can be a little tricky because it’s easy to overlook small things (advertising, marketing, website hosting, travel, etc.) and get a surprise you really don’t want. Monthly expenses also include working capital, rent or mortgage, insurance, taxes, loan payments, utilities, payroll, inventory, and of course paying yourself.

  1. Get Better Pricing

Once you conduct spend analysis, you would know what you are buying and at what price. You should then try to get a better pricing on those items. There are multiple ways to do that:

a) Having an internal procurement team who can reach out to vendors and get different bids can be good for your business. There are multiple e-sourcing tools like like Coupa, GEP, Ariba which can help in automating this process.

b) You can use third party services like ProcureDesk, Xchanging, Optimum Procurement which provides spend visibility, and negotiate pricing on your behalf.

c) You should consider combining purchasing volume using a group purchasing organization (GPO). In the United States, GPO is an organization that is created to combine the purchasing power of all parts in order to provide higher value to members. That way, sellers treat all members as part of a single entity and base contract pricing as well as other benefits on total sales to the group. This kind of greater volume of sales allows contracting sellers to offer lower prices and higher levels of customer service.

  1. Extend payment terms with your suppliers

Extending your payment term with suppliers could be a potential vehicle for extending your cashflow. Identify your top vendors and have a conversation with them regarding extending the payment terms. Let say from Net 30 to Net 60 days. Even if it not possible for all vendors, extending the payment terms for top vendors will give a significant boost to your cash flow and reduction in working capital cost.

  1. Reduce Unwanted expenses

Reducing business costs is not just a matter of cutting cash outflows aimlessly. To reduce business expenses, it is important to take a considerate and methodical approach.

You should start with reviewing all of your company expenses to identify those costs that you can easily eliminate without any negative effect.

For example, in most of companies 40% of office paper is discarded within 24 hours after printing on it. If you calculate how much money you spend on printing supplies, paper, and labor, you’ll quickly see that using electronic file storage can help you with reducing business expenses. So, just use free online space through services like Google Docs, DropBox or Cloud Drive.

Bottom line, once you know what your expenses are you will be able to see what costs are not required.

Conclusion

It’s a fact, it is easier to save money than to make it. So, you should learn about the importance of saving and teach your employees the same lesson. Cutting costs is the most appropriate, the quickest and easiest way to improve the profitability of your small business. Hope these tips will help you with cutting down on expenses and ensure that you remain competitive in the longer term.

This article was written by Sachin Sharma from Business2Community and was legally licensed through the NewsCred publisher network.