- When times are tough, the knee jerk reaction of many business owners is to slash costs. What’s wrong with such a strategy?
- Future business growth can be compromised
○ Marketing and Sales can suffer
○ Good staff can be lost and new ones are costly to find and train.
- Customer and staff morale/satisfaction declines
- On the flip side, when business is good, owners tend to ignore costs and focus on Sales and business growth and figure that the costs will take care of themselves with a good margin. What can happen with that kind of approach?
- Net profit squeeze
○ Cash flies out the window
○ Overheads creep up
○ Benefit of growth gets wasted
- Cash flow problems – growth doesn’t always = cash
- Clearly, when sales are down, there is a much greater motivation to control costs even though good businesses never take their eye off them. So how should you identify the areas that should receive attention first? What tools should you use?
- Organisation Chart – sets out what gets done and who does it
- Job descriptions – in line with Organisation Chart
- Profit and Loss Report – review all direct costs and running expenses and ask yourself
○ How can it be done more efficiently
○ How can it be done more cost effectively
○ Should we stop doing it
- Cash Flow Forecast to plot future cash position
- Supplier Purchases reports
- Use technology – website – CRM
- Over time, particularly in boom times, businesses get flabby. Where are we most likely to find inefficiency and waste?
- Staff overlaps and gaps due to lack of job descriptions.
- Premises – too large or in the wrong (expensive) location.
- Communications – old fashioned/defunct phone lines etc.
- Banking – not regularly reviewing and better deals/methods sourced.
- Use of Technology – not keeping abreast of efficiency gains available.
- Operations – not regularly analysing more efficient processes.
- Freight – shop around/reconsider regularity of deliveries.
- Business Model – check out modern methods and use technology to update.
- Accounts Receivables – no process and ad hoc follow ups if any.
- Stock Management – over purchasing and not shopping around for best deals (constantly!)
- Job management – no management or system in place to ensure quality, efficiency and ability to finish jobs and invoice quickly.
- You often hear about savings being achieved by re-engineering workflow. How can you do that?
- Map it out
- Brainstorm with key staff
- Do customer surveys
- Investigate/observe others in industry
- Seek industry innovation ideas via associations, events, training etc.
- ‘Change Management’ Plan/Business Improvement – ‘Lean’ method – consultants can help
- Work On your business
- Use checklists/templates to standardise operations and constantly improve (creates mechanism for absorption of improvements).
- How can savings be made to a business’ products and services without impacting customer satisfaction?
- Look for efficiencies not just savings
- Client and staff surveys (find out what they do/don’t value)
- Some savings could improve customer satisfaction
- Contact via electronic newsletters/blogs/social media
- Review marketing methods – check out digital marketing and social media etc. (outsource if you aren’t up to speed with it)
- Having identified where you are going to make your savings, how should you go about achieving them?
- Put the customer first – savings should not adversely affect them
- Look for efficiencies not just savings
- Leadership – walk the talk – get your team involved
- Start with the end in mind – how do you want the business to look in future
- Culture and communication/team involvement
- Project – put someone in charge of it and document it
- Implementation – delegate to those involved/affected
- Reporting – look at percentages compared to budget
- Constant review/work
- Celebrate! When savings achieved take time to celebrate and appreciate efforts with a modest staff lunch or morning tea – keep the team motivated.
- What are the biggest mistakes you see business’ make in trying to achieve cost savings?
- Approaching it in an ‘ad hoc’ way
- Not treating it as an ongoing job
- Cutting the wrong costs such as marketing, advertising, good staff
- Not negotiating properly – it’s an art
- Creating bad will with suppliers
- What are your thoughts on downsizing and outsourcing?
- Downsizing has to be approached on a case by case basis
○ Businesses can become obsolete due to technology and need to be pragmatic about their future and how they will compete /survive/thrive
○ Some grow too fast initially without planning and get beyond help.
- Outsourcing is a terrific way of keeping costs down
○ ‘Variable costs’ can be only incurred when a sale is made e.g. subcontractors, however there can be an issue with quality/availability of supply.
○ Non core activities can be a good thing to outsource e.g. bookkeeping & financial management, virtual assistance, virtual office space, marketing, human resources management, debt collection etc.
- When do you know you have cut too far?
- When customer satisfaction slips
- When staff satisfaction slips
- When WHS is compromised
- When operational issues are caused
- Can you give us some examples of how you have helped some of your small business clients to find cost savings and the results they achieved?
- Client in Brisbane was using debt factoring – analysed situation and discovered an overdraft reduced interest by circa $30,000.
○ Helped them put a good case to bank for overdraft – budgets, cash flow forecasts, tidy financials
- Travel Agency client – retail and corporate travel – moved from retail shop front to cheaper location after determining most business was from ‘corporates’ rather than ‘walk-ins’
- Wholesale Baker – packaging supplier – got them to investigate and negotiate – saved around $20,000 per annum
- Is there one thing a business owner could do straight away to reduce their costs?
- Diarise time to look at the P&L and ask
○ How can we do this more efficiently
○ How can we do this more cost effectively
○ Should we stop doing this
- Investigate and embrace technology
- Be ‘open-minded’ about doing things differently
- Now there are a lot of people who say they provide advice on how to manage their costs. How can you tell the difference between the good & bad ones?
- Cost savings should be a ‘whole of company’ effort and not just be outsourced
- The overall business needs to be supported by a Virtual CFO
- The business vision and mission needs to be considered
- Ad hoc occasional savings can be detrimental to stakeholder experience
- It needs to be a constant exercise done in an organised way
- Are there other resources you would recommend for those seeking to manage their costs?
- Just google ‘cost savings business’ there are millions of them!
- Web sites have good advice for small business
- Find someone to act as a ‘sounding board’ like a Virtual CFO with solid commercial experience, who can help you work through the process without compromising your business
For more ways to improve your business cash flow download our eBook ‘7 Ways to Stop Cash Flow Chaos Forever’