4 Disciplines to Reduce Cash Outflows
Driving the bottom line through profitable revenue growth is the number one focus of virtually every company. But, remember only a small portion of revenue reaches earnings. A pound or dollar saved from cost, however, goes directly to the bottom line. So, while focusing on the top line, don’t forget to engage in a systematic approach to governing expenditure as a way to ensure long-term value creation.
1. Cost Control
Cut down on overspending and your business could enjoy more profit. Consider:
Staff and human resources: review your team, including permanent staff and contractors. Their contribution to your business can be invaluable, but some roles will become obsolete or too expensive over time.
Suppliers: agencies are costly and sometimes nonessential. Just like your immediate staff, suppliers should be contributing meaningfully in a measurable way.
Premises and office space: how much space does your business really need? It’s easy to anticipate how much space you could need in the future, but it adds a lot to your rental costs. If your business can adapt to a remote-working model, you’ll be able to save on office space and the associated overheads.
2. Buy more effectively
Adopting a strategic approach to purchasing will boost the efficiency and profitability of your business.
Avoid excess inventory. Physical stock can become ‘dead stock’ if left unused, avoid over-investing and encourage your staff to reuse and repurpose wherever possible.
Small outgoings such as digital resources, user licenses and subscriptions can easily be overlooked but equally accumulate quite considerably if they’re not measured and quantified.
Avoid multi-year contracts. It is more often than not smarter to avoid multi-year contracts as it forces you and your supplier to assess the value you have received, the potential rewards you should receive for continued loyalty and the comparative offers and incentives to move to a competitor in the market.
Centralise purchasing, it allows for a lot more control over purchasing on all levels and minimises waste.
Identify preferred suppliers against criteria such as quality, price and delivery history. This will mean you have options and can make better informed decisions on suppliers and purchases.
Build strength in your supply chain through long-term relationships and geographical partnerships. Better quality products and price consistency are the principle advantages of strong relationships.
Negotiate always. It’s important to review and negotiate agreements regularly and reconfirm your preferred suppliers and supply chain preferences.
3. Add discipline to invoicing and payment systems
Credit risk assess new clients before agreeing to provide high value products or services and adapt their payment terms in line with the risk.
Invoice promptly, preferably immediately to minimise the drag on your cash flow.
Invest in invoicing software to issue demands and reminders and track aged invoices.
Invest in online accounting software to easily capture expenses incurred and hours spent on delivering a project. It will allow you to bill clients more accurately, quickly and maintain reliable, detailed records should there be a dispute.
Offer early settlement incentives. For example, this could be a 10% discount if an invoice is paid within 7 days.
Tighten your payment terms. While many businesses operate a 30-day payment cycle it’s not obligatory to do so and you could ask for bills to be settled within 7 or 14 days.
Have strict credit control processes in place to discourage late payment and non-payment. This includes automatically tracking invoices, offering discounts and incentives for early payment, and charging late fees where necessary. Monitor customers who are drifting and nip any bad patterns of behaviour in the bud.
Enforce your payment terms, be polite but persistent and as a last resort remember there are legal measures at your disposal.
Negotiate manageable payment terms with your own creditors, which will help keep your cash flow healthy.
Remember, the invoice is often the last direct communication you will have with your client, and so you should make sure it’s not going to be the last one. Give some thought to your invoice, make the tone of voice friendly, keep it simple, include your branding, an ‘appreciation’ note and friendly reminder of your payment terms. And, send a ‘Thank You’ note after the payment has been received.
4. Leverage tax efficiencies
Your business may benefit from tax relief, which will help you retain profits in your company.
For example, UK companies are able to claim tax relief for their Research & Development (R&D) activity. This government scheme is designed to boost innovation by supporting businesses who seek to improve or overcome challenges or uncertainties in their products and processes. Your company can claim up to 33% of what you have spent, and the definition of R&D is much wider than you may think.
To qualify, ask yourself:
Do you design or make new products?
Do you seek to improve processes, services, materials or devices?
Do you make prototypes or perform testing?
Do you develop software or IT solutions?
Have you invested in failed projects or developed products that are never launched?
Do you employ any staff with a technical or scientific background?
You can claim R&D tax relief through HMRC’s online service, or with the help of a R&D tax specialist, up to 2 years after the end of the accounting period.
READ NEXT: How to analyse the financial health of your business
WANT TO LEARN MORE
Selina Bolton is a business strategist and the founder of Seed.Partners; a mergers & acquisitions firm specialising in attracting investment and creating opportunities for small to medium-sized businesses to scale and build value at pace.
Contact Us to find out how we can partner with you to accelerate your business growth.