Most small business owners say that establishing and growing business profitability is their top goal.1 According to SunTrust Research of 397 business owners in 2017, the next two operational goals are creating more regular cash flow and reducing expenses.1 Often with fewer financial and other resources, small business owners must carefully manage spending and look for opportunities to stretch funds.
There are many long- and short-term measures to cut costs, including these five tactics that business owners should consider.
1. Automate employee expense controls and reporting
According to a 2016 Certify survey, 53 percent of respondents cited expense management automation as a “must-have”.2 Expense management automation provides businesses greater control over expenses with automated authorization and spending limits applied to specific spending categories and vendors.
One of the first places to manage expenses is employee-controlled spending like travel and entertainment, fuel, office supplies and other business purchases. SunTrust Research shows that 27 percent of businesses control employee spending with authorizations.1
Start with approval levels by expense category and by employee. One way is to use business credit cards equipped with employee-specific expense-control features and reporting for better expense tracking.
Look at regular reporting of a few key metrics. A daily or weekly report to directly measure cash, profits and targeted items, e.g., major purchases, significant sales, etc., can give you visibility into the key metrics for your business. You might be able to create the report in your financial management system, or give your CPA selective access to your online financials to efficiently generate the reports you need to manage costs.
2. Match payment terms with your cash cycle
Your cash cycle — the amount of time between paying for the goods and labor to produce your product, and the amount of time it takes your customers to pay you — often determines your ability to generate cash. Given that 46 percent of business owners say that monitoring and forecasting cash flow more closely is a top objective, actions to shorten the cash cycle are at the top of the list.1
For money owed to you, be strategic when setting payment terms, and examine the schedule to see where you can improve the utilization of your cash flow. A third of businesses look to offer customers different forms of payment like payment via credit card or ACH.1 Another twenty percent are looking to better automate their collection process with self-pay options for customer and automated payment reminder messages.1 The two top strategies, according to SunTrust Research, are to schedule electronic payments to be sent on the due date (not earlier) and to negotiate extended terms with vendors.1
3. Renegotiate contracts with suppliers
Although it’s easy to fall into a routine with your regular business suppliers, it’s important to constantly assess whether you’re getting the best deal. SunTrust Research shows that 38 percent of businesses looking for profitability improvement are working to lower costs of materials and services bought from vendors.1
A place to start is to benchmark your costs using data from industry publications on industry cost standards. If benchmarks are not available, simply re-bidding purchased goods and services with multiple companies should help establish the best price available in your market.
Many companies don’t take those steps. “We see [business owners] overlooking this because everyone seems to get in a comfort zone,” says Richard Weinberger, PhD, CPA, chief executive officer of the Association of Accredited Small Business Consultants says. “They’ll get to know the particular suppliers or vendors, but prices continue to inch up.”
With a bidding process, a long-term supplier will often be more likely to negotiate new terms. If you’ve laid the groundwork for a working relationship, these vendors are sometimes willing to compromise on prices to keep your business.
4. Reduce overhead by looking at automatic charges
According to SunTrust Research, half of business owners are looking to boost profits this year by controlling administration and overhead.1 One strategy involves reviewing all “routine” expenses and questioning whether they should continue.
Look through automatic or routine monthly and annual expenses for your company. Do you still want the maintenance contract on that piece of production equipment? Are you using the software and media subscriptions that are on automatic renewal? Ask these questions of all routine expenses.
5. Consider telecommuting
Traffic isn’t getting any better in most cities, and technology options supporting remote work continue to improve. By giving your employees the opportunity to work remotely, you can save money on resources and office space. “That tends to be a pretty significant cost-cutter,” says Rick Meekins, managing partner at Aepiphanni Business Consulting. “We just had a client do that, and it just saved probably about $2,000 a month in office space.”
Whether you’ve been taking current budgets and expenses for granted or have let cost-cutting lose priority to other business objectives, these five steps can help you uncover significant savings.