Subway Co-founder Fred DeLuca said: “There are only two ways to make money: Increase sales or decrease costs.”
Of course, increasing sales is pretty much always a top priority for most businesses. But, decreasing costs tends to only really become an issue when sales decline.
When the economy hits the doldrums and sales dry up — as is the case at the moment for many industries all over the world — companies tend to start looking at ways to cut costs. While it’s great that they are trying to cut back on expenses, it’s a shame that they don’t do it even when sales are booming. The fact of the matter is, even great businesses tend to be rather inefficient. A lot of money is squandered when it’s ‘business as usual’. And the larger the organisation, the greater the tendency for money to be wasted.
So try to see the need to cut costs not as an inconvenient short-term intervention, but as a prudent long-term strategy. After all, the more you can cut costs, the more competitive you can be in the marketplace.
But where to start? Below you’ll find six areas in which you can cut back on expenses, provided you’re willing to make some tough decisions and dig deep into the financials of your business.
1. Implement thorough systems and processes
As the old saying goes: You can’t manage what you don’t measure. If you’ve had a fairly laissez-faire approach to managing your company’s money until now, you need to start paying attention to the details. If you want to save money, doing the bare minimum when it comes to financial controls is simply not good enough. You need to start examining each and every line item. Make it your business to understand the details of your company’s financial situation.
If you have been paying pretty close attention to the details until now, it’s time to take things to the next level. Implement systems and processes that allow you to keep a handle on each and every expense. Make it mandatory for every expense above a certain amount to be signed off by a C-level executive, for example. Or make it your personal responsibility to release every online payment.
2. Seek outside assistance
Unless you have a strong financial background, or your company is large enough to employ a very experienced CFO, you might want to consider bringing in some outside help. An external (and unbiased) professional will bring a fresh perspective to the business and probably be able to see unnecessary expenses that you don’t notice. He or she will also keep everyone in the organisation accountable and honest.
3. Lead by example
It’s very difficult to explain to employees why the two-ply toilet paper or free coffee needs to go if you’re still flying business class and stocking your personal fridge with Evian water. There’s nothing wrong with asking employees to make sacrifices, provided you’re willing to join them in the endeavour.
It’s also worth creating a culture of frugality within your organisation that stretches from the very top to the very bottom, and isn’t impacted by how well the company is doing at any particular time. Amazon, for example, is a company that prides itself on its frugality. It’s even one of it’s 14 core ‘leadership principles’.
The principle says: We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self-sufficiency, and invention. There are no extra points for headcount, budget size, or fixed expenses.
4. Lease, don’t buy
If you’ve got the money, buying is often better than leasing. Buying an expensive piece of equipment, or even a piece of real estate, can be a good idea, since you’ll eventually own it outright and no longer have to pay for it. You’ll hopefully also be able to sell it at some stage, which will allow you to recoup some of the cost. In the case of real estate, you might even make a profit.
However, when you’re worried about costs, leasing might make sense. By leasing, you won’t tie a lot of cash up into an asset that can be hard to offload, and you’ll improve your cash flow.
If you negotiate a good lease agreement, you might even be able to cancel the lease on short notice if it turns out to be too expensive.
5. Ditch expensive debt
Not all debt is created equal. If you want to save money, look at the interest associated with all the debt in your business. Focus on paying off the most expensive debt with the most unfavourable terms, and place less emphasis on the debt with low interest. This won’t have an immediate impact, but it will save you money in the medium to long term.
6. Put off big expenses
This should be pretty obvious, but it’s worth stating explicitly: Unless there is a very, very good reason for it, avoid big expenses while times are tough. Chances are, you’ll be able to justify the expense if you try. A bigger store will allow you to service more customers, increased production will result in increased sales, etc. Be firm. Don’t be seduced by what the result ‘could potentially be’. If the impact isn’t guaranteed and immediate, let it go.
CProduction and Operation
7. Examine production costs
You’ve probably heard of the 80/20 principle. It says: Roughly 80% of the effects come from 20% of the causes. For instance, 80% of your sales come from 20% of your clients, or 80% of the truly impactful work done in your organisation comes from 20% of your employees.
Well, it turns out this principle can also be applied to production. There is a good chance that a relatively small number of items are responsible for an inordinate amount of your production costs. It might not be 80/20, but it could be significant enough to warrant discontinuing those items. Look at every line item. Can its continued production be justified financially? This is an exercise that should be conducted regularly.
8. Tighten your inventory
Chances are, there are systems and processes in place that dictate your company’s inventory management. Only 20 left of item X? Restock. Only 10 left of Y? Order now. If you’re trying to save money, though, you need to fundamentally relook the way you manage your inventory. Specifically, it’s worth looking at something called just-in-time (JIT) inventory management.
First created by Toyota in the 1950s, the JIT principle promotes exactly what its name suggests: Manufacturing and procurement that is tightly aligned with demand. More items aren’t produced simply because ‘it’s the rule’ or because there is excess capacity.
Instead, items are created ‘just in time’ to meet demand. What’s good about this, is that it reduces unnecessary production costs, limits the amount of stock you need to house somewhere, and can also reduce labour costs. However, if demand suddenly spikes, or the price of products/materials suddenly skyrockets, you can run into trouble. Successful JIT inventory management is a bit of a balancing act.
9. Sweat the small stuff
As mentioned earlier, even great systems tend to be quite inefficient when you really start to look at the details. It may seem as if you’ve cut costs in absolutely every way conceivable, but there are almost certainly other expenses that can still be cut. To find these, though, you need to think outside the box. We’re not talking about line items here, but instead about all those small expenses that hide within every individual line item.
In 1987, for instance, American Airlines famously saved itself $40 000 by simply cutting olives from its in-flight salads.
Similarly, when the US economy crashed in 2008, McDonald’s got creative with its Double Cheeseburger. It removed one of the slices of cheese from the burger and called it the McDouble. The saving from removing a slice of cheese from every burger? $15 000 per restaurant per year.
10. Hire superstars
Red Adair was an American oil well firefighter who became notable as an innovator in the specialised field of extinguishing and capping oil-well blowouts. Working in an extremely dangerous industry, he remarked: “If you think hiring professionals is expensive, try hiring amateurs.”
Bill Gates said something similar: “The key for us, number one, has always been hiring very smart people.”
Recruiting a well-educated person with loads of experience will be expensive, sure, but you need to consider what that person can do for your organisation. Hire a great person, and he or she will be able to do the work of two, or even three, people. So if you want to save your business money, don’t try to cut costs when hiring. Instead, hire people who will add a lot of value to your operation.
11. Send your people home
The cost of an employee is not limited to his or her salary. You probably stock the kitchen with coffee and milk, and the bathrooms with toilet paper, for example. Then you need to consider the costs of all those telephones, computers, lights and air-conditioners. This all adds up very quickly.
With this in mind, a good way to cut back on expenses is to give employees the option of working from home. Even if it’s just one day a week per employee, the savings can be very significant. IBM released a study on working from home (which it calls telework) in 2009 that revealed that the company saves about $100 million every year in the US alone by letting people work from home.
The report stated: In the US, continuing annual savings amount to $100 million, and at least that much in Europe. With 386 000 employees, 40% of whom telework, the ratio of office space to employee is now 8:1, with some facilities as high as 15:1.
12. Cut back on travelling
If your employees are constantly flying to meetings, you might want to look at ways to limit business travelling. You can, for instance, rig out your boardroom with everything needed for high-end tele-conferencing. Large screens and a fast Internet connection might seem expensive, but just compare it to the cost of constant air travel.
It’s also a good idea to look at exactly why and how often your employees travel. If someone is flying to Beijing to sign a huge deal, that’s understandable, but do away with long-distance travel for low-value meetings.
13. Renegotiate with suppliers
If you’re feeling the pressure, chances are your suppliers are in the same position. This provides you with an opportunity to renegotiate with them. You can even play hardball and try to renegotiate prices. If a supplier is desperate to keep you as a client, there’s a chance that the company will give you a better price.
However, with most organisations feeling the pressure of increased production costs and a weakening rand, there probably won’t be much wiggle room when it comes to price. So what can you try to renegotiate with a supplier? Well, you can try to get your credit extended.
In other words, instead of having 15 days to pay a supplier, you could have that pushed to 30 or even 60 days. This doesn’t exactly reduce expenses, but it does free up cash in your business. Amazon does this to great effect, funding its growth by selling goods before it has even had to pay for them.
Conversely, you can also try to negotiate for a discount if you pay your supplier quickly.
14. Create a buying cooperative
While you can try to negotiate for better prices, suppliers are usually only really keen to offer a reduced rate if you purchase goods in large enough quantities. If you’re a relatively small operation, this can be hard to do, which is why you might want to consider the creation of a buying cooperative alongside other businesses.
A good example would be a small construction company. By pooling resources with similar operations, the owner of a smallish construction business can create a far better bargaining position for himself. Instead of buying bricks and concrete for one operation, he’s now buying for five or ten. With a bigger order comes bigger margins for the supplier, which means lower costs for the cooperative.
15. Barter, don’t buy
Too few companies recognise the value of bartering. That’s unfortunate, since it can be a fantastic way to save money. All you need is a supplier that also wants what you’re offering. Say, for instance, that you sell office supplies.
Well, that’s something just about everybody needs, including your accountant, marketing agency and IT company. So instead of paying outright for all these services, why not try to barter for at least some of it? It requires some creative thinking and good negotiation skills, but it’ll be worth the effort.
16. Relook your pricing
As mentioned at the start, making money means either selling more or decreasing costs. Well, there’s actually also a third option. While you should focus on cutting costs, it’s also worth taking a look at your pricing. At some stage, increasing prices is a necessity that can no longer be ignored.
Perhaps you don’t need to increase prices across the board, but take a look at what your individual clients are paying. Are some of them perhaps receiving rates that can no longer be justified? Maybe they were huge customers at one stage, but are now also cutting back on expenses.
17. Get clients to pay quickly
When it comes to suppliers, you want to try and extend your credit. When it comes to your clients, however, you want them to pay as quickly as possible. A good way to do this is to offer discounts as an incentive. True, it’ll tighten your margins a bit, but it’ll also free up cash in your business.
18. Save on shipping and deliveries
Shipping and deliveries can cut into your profits very quickly if you’re not careful, so it’s worth looking at ways to reduce costs. A good idea might be to invest in a fleet management system that can help you to streamline your operations. It’s an added expense, sure, but it can save you money in the long run.
US transport company UPS, for example, implemented routing software a few years ago that reduced left turns to the bare minimum (in the Unites States, of course, turning left means cutting across oncoming traffic). By doing this, the company shaves a massive 20 million miles off its total routes every year.
It’s also worth examining how often you deliver to customers. If you’re worried about cash flow, your clients probably are as well, which means they’re opting for small and frequent purchases, instead of large and occasional ones. So don’t deliver to clients three times every week. Insist that they increase the size of their orders, or else fetch their goods from you.
The Simple Way To Pay Wages When Your Staff Don’t Have Bank Accounts
If you have employed casual workers over the busy season, you can pay wages even if they do not have bank accounts.
At Absa Business Banking, the things that are important to you are just as important to us. We understand your business needs, which is why we have developed tailored solutions to help you where it counts. Take CashSend Plus, for example. It is a payment solution that enables you to pay workers even if they do not have bank accounts.
It is safe and secure
Your employee will receive a six-digit access code and a ten-digit reference number, so that they can verify the transaction. The money is instantly available at an Absa ATM.
You can even pay yourself
We have all lost bank cards or wallets at some point in our lives. What an inconvenience. Well, it is good to know then that you can access cash by sending it to yourself. Now, that is what we call better.
Please speak to one of our consultants or call 0860 111 123 or visit your nearest branch.
Absa Business Banking
Do better business. Prosper.
Entrepreneurial Balancing Acts with Debt
Young South African entrepreneurs face many challenges when it comes to debt-related financing. Small and medium enterprise (SME) owners typically require extensive debt financing from bank and non-bank lenders.
Young South African entrepreneurs face many challenges when it comes to debt-related financing. Small and medium enterprise (SME) owners typically require extensive debt financing from bank and non-bank lenders. Unfortunately, many South African entrepreneurs are limited in their ability to access capital markets. Among others, the major challenges facing entrepreneurs include lack of credit history, no collateral, shaky credentials, and unformulated business plans.
Regardless, SA entrepreneurs are forging ahead and using multiple resources at their disposal such as payday loan providers, non-bank lenders, family and friends, crowdfunding and other economic empowerment initiatives to raise the necessary seed capital for investment purposes. Given the staggering unemployment rate in the country (+25%), the only way out for many people appears to be entrepreneurship. The 2008 global financial crisis threw the economy for a loop, and now the hopes and dreams of many South Africans hang in the balance.
ISM Study Sheds Light on SA Entrepreneurial Pros and Cons
An intensive study conducted by the University of Cape Town’s Unilever Institute of Strategic Marketing (ISM) found that the country is experiencing ‘a crisis of aspiration’. Simply put, many South Africans are struggling to attain their career objectives in an economy that has been ravaged by corruption, mismanagement, and scandal. Despite tough economic times, South African entrepreneurs are determined to try their luck. Pressing challenges in the form of rising unemployment, and an economy mired in failure are challenging entrepreneurs to be more inventive than ever before. The most volatile component of the economic spectrum in South Africa is the middle class.
Many South African families have lived the high life, or ascended the rungs and then been knocked down a peg. This instability is creating added volatility in a country where high crime, mismanagement and political rancour pepper the scene. For many entrepreneurs, any access to credit is a godsend. Banks and non-bank providers offering personal loans, business loans, or credit card funds invariably expose themselves to debt default. For entrepreneurs, it’s important to know where to draw the line. Access to lines of credit in a crippled economy is significantly more valuable than the equivalent access in a developed economy.
How to Know when you are Overstretched as an Entrepreneur
Debt is considered a prerequisite for investment purposes. Most South Africans simply don’t have the necessary capital to start up a high-tech venture, fund a new business, or conduct marketing and advertising activity. As such, lines of credit are increasingly being used to propel business activity among SMEs – both in the formal and the informal sector. However, once debt reaches untenable levels, the tough questions need to be asked. For example, if multiple loans and multiple payments are required monthly, revenue streams need to be evaluated against expenses to gauge whether this is a feasible status quo.
Related: How To Handle Your Post-Holiday Debt
Many entrepreneurs find it difficult to manage multiple loans simultaneously, although it is necessary to acquire the capital from multiple sources. One of the ways to deal with these types of exigencies is a single loan from a low-cost lender in the form of debt consolidation loans. Simply put, these loans are provided by bank or non-bank lenders at lower interest rates than the prevailing interest rate on other lines of credit. By taking out a debt consolidation loan, the entrepreneur has more disposable income over time by not paying the higher interest on credit card debt.
Escape Debt Before Debt Consumes You
There are several other ways to know when your personal financial situation has reached critical mass. For starters, the nature of your business may require you to continue dipping into lines of credit to maintain business operations. If you don’t have the requisite discipline to stop indebting yourself, you may not be able to get out of debt. Debt consolidation is only effective insofar as you have the necessary discipline to put an end to debt financing of all business-related activity.
Credit should be used sparingly, and profits should be generated to allow your business to prosper. In a tight economic climate, costs are the bugbear that need to be attacked. Lavish trappings are unnecessary for business functionality – modest budgets, and high-quality goods and services are far more effective than window dressing at a premium.
How South Africa’s Small Businesses Plan To Invest Their Money In 2018
Here are their five areas they should focus their attention on in the next year and beyond.
Despite economic uncertainty, South Africa’s small businesses are positive about the future. In fact, our State of South African Small Business report reveals that 40% of small businesses are expecting to grow. However, to achieve growth without overextending their limited resources, small businesses need to invest wisely.
Here are their five areas they should focus their attention on in the next year and beyond.
When times are tight, companies typically reduce their marketing spend. This isn’t the case for 36% of South Africa’s small businesses. These respondents recognise marketing as a critical investment area.
They’d rather make a concerted effort to grow their customer base, than sit still and do nothing as consumer demand declines.
Without access to the latest technology, business growth can quickly stagnate. This is why 23% of South Africa’s small businesses plan to invest in up to date equipment, whether that be new machinery, mobile devices or computers.
The right investment in this area can give a business a real competitive advantage.
It can help boost profits and improve operational efficiency – both of which can help a small business withstand difficult economic conditions with greater success.
Consumers are spoiled for choice. Their needs are constantly changing and companies can’t afford to become complacent. To keep up with market demands, 22% of small businesses plan to invest in product development. Barring a few timeless classics, most products need a regular review and tweak to stay relevant and popular.
Digitisation is transforming business functions across the board. Technologies, like cloud software can take care of laborious administrative work.
This liberates employees from time-consuming tasks, enabling them to focus on more strategic work like customer retention and acquisition.
Technology has the power to improve productivity and efficiency. Which is why 18% of small businesses are going to focus their investment plans on this area of their businesses.
The customer should always be the priority. It doesn’t matter how good a product is, if there are no customers, then there’s no business. As competition increases, the user experience becomes more and more important to win over customers.
Business growth depends on happy customers and to achieve that, 18% of small businesses plan to invest in delivering better service.
All five of the above business areas are worthy investment focuses. The question is, how does a small business work out what to invest where? The only way it can invest effectively is with a full view of its company finances. A small business needs to be able to see which functions have provided the best return on investment to date.
It also needs to consider how much investment capital it has to spend. What’s more, before it makes an investment in say, marketing or product development, it must know exactly how and where the money needs to go.
The right software can help a small business access the real-time insights it needs to make better, faster financial decisions. To combat increased competition and market uncertainty, South Africa’s small business owners need access to up-to-the minute information from any device no matter where they are. An informed investment has the greatest chance of success.
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