Commercial

Squeezing Expenses to Generate Cash

Four Keys to Reducing Costs and Increasing Profits

Looking out the window
 
 

Growing profitability ranks among the top two goals of middle market and small business executives1.  Reducing costs is the top strategy to generate that profitability and to find cash needed to finance growth2.

Expense control efforts – falling into four major categories – can help you manage expenses and generate more cash and profits in a short period.

Squeezing costs – generating profits

squeezing costs and generating profits
 

Cost-cutting strategies

Finding profits starts with cutting expenses. Whether you presume that a business is spending too much or start with a more measured approach, here are three specific actions for expense reduction:

Know your strategic costs. You should understand the things that make and save the most money and try to aggressively cut everything else. Costs directly linked to product quality, excellent customer service, profitable new sales or your defined competitive edge are usually considered strategic. All other expenses can enjoy more scrutiny.

Never let expenses become routine. Periodically examine non-strategic costs to find savings. Have your team study several non-strategic expense accounts each month for expenses you can remove or slash.

Keep a handle on your travel and entertainment (T&E) expenses. With T&E budgets typically representing 10-12% of total revenue3, it is important to not only manage the costs, but also to manage the process of authorizing, accepting, paying and analyzing these expenses. Business credit cards can give you greater control over authorizing these expenses and can simplify payments while providing more visibility and reporting needed to pinpoint saving opportunities.

Build a smarter budget

Strong budgeting and tracking on a monthly (or more frequent) basis allows your organization to understand and track regular expenditures. Here are three actions you can take for effective budgeting:

Create a monthly budget, but retain enough flexibility to make changes as the business shifts throughout the year. The budget should act as a guideline, but should not constrain the company to execute on it plans and serve its customers. It should act as a tool that is used to make business decisions. As unplanned events – both positive and negative – take place throughout the year, leave your company the option to spend more or less than planned in a budgeted area, but be prepared to explain the variance.

Start your budgets with zero. Profit-oriented managers create “zero-based budgets,” where they start with a clean slate every year. Spending a weekend adding up your monthly costs and looking for duplication, waste or purchasing savings may sound boring, but it likely will identify significant cost savings.

Capabilities-driven strategy. While budgets can be great tools, they are almost always based on past events. If you know that certain products are trending, that customers’ demands have taken a new direction or an innovative technology is on the horizon, use the instinct you have developed to guide your budgeting process. This will allow your budget to be more dynamic. This approach fits as one component of Booz & Company’s, “capabilities-driven strategy”. It allows you to shift resources to business activities that are truly differentiating and away from those that are not as you move finite resources toward high-return activities.4

Compare your expenses

Business executives build strong relationships with their vendors and service providers, but that doesn’t mean they shouldn’t consider benchmarking and bidding out their top expenses:

Bid out costs regularly. Expenses that do not go out for bid might be wasted cost-saving opportunities. Don’t accept price increases from vendors without thinking about looking for competitive bids. Even telling a supplier you are considering putting work out to bid can generate cost-saving ideas. Also, find out where your competitor sources its components or key services and get a proposal from that supplier.

Benchmark your costs. Industry publications and research can often outline industry cost standards that you can use to benchmark your own organization.  Sourcing consultants, many who will be paid on a performance basis from savings generated, can also help in this process.

Get control

Controlling expenses often starts with the right systems in place.

Approve all expenses. Set approval levels by expense category and employee. The secret is doing this without spending a lot of time. One way is to use corporate credit cards equipped with sophisticated, employee-specific expense-control features. Another is to require secondary authorization, in writing, on high-value expense categories.

Automate expense controls. You can better control most of your company’s expenses by spending a little time using basic online banking tools and controls.  According to a 2016 Certify survey, 53 percent of respondents cited expense management automation as a “must-have”5. Set the authority to approve all expenditures, and restrict others using automated entitlements, authorization and spending limits, particularly for strategic or high-value expense categories.

Track expenses regularly. Create a flash report to directly measure cash, profits and net worth. Watch them monthly, weekly or even daily. Ask your financial team to generate the regular cash flow, expense budget and profitability reports you need to manage profits. For smaller businesses, give your CPA selective access to your online financials to efficiently generate the reports you need to manage costs and profits.

Use online and real-time tools. Your bank can help you set-up a range of alerts and reminders related to cash consuming transactions with online bankingbill pay, tax payment, direct deposit, payroll and cash-management systems. These cost-control measures improve visibility related to expenses and allow you to gain better control over tomorrow’s profits.

 

Looking for profitability lift from cost reduction?  

Call your SunTrust Relationship Manager or visit at suntrust.com for ideas and tools to tame expenses.

1 SunTrust’s 2017 Business Pulse Survey

2 SunTrust’s 2017 Business Pulse Survey

3 Certify’s 2016 Expense Management Trends: Annual T&E Outlook and Benchmarks, December, 2015, accessed 2/15/2017, https://www.certify.com/2015-12-10-2016-Expense-Management-Trends--Annual-TE-Outlook-and-Benchmarks.

4 Peters, Josh,“A Better Way to Cut Costs”, Forbes, March 2014, accessed 2/15/2017, http://www.forbes.com/sites/boozandcompany/2014/03/31/a-better-way-to-cut-costs/#2342334226ca.

5 Certify’s 2016 Expense Management Trends: Annual T&E Outlook and Benchmarks, December, 2015, accessed 2/15/2017, https://www.certify.com/2015-12-10-2016-Expense-Management-Trends--Annual-TE-Outlook-and-Benchmarks.

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