Ask Us How: Business Spending

Posted by Michael Derin

Published on October 16, 2013 under NSW Business Chamber Partnership

The importance of business spending is underestimated in business and it is important to know how to manage spending for the future profitable growth of your business.

STRATEGIES TO CONTROL ‘REQUIRED SPENDING’ TO ALLOW FOR GROWTH IN YOUR BUSINESS

The management of your spending is a critical art to being a successful business person. 

It does not require a deep level of financial expertise but does require a level of understanding around business needs and expense allocation.

I would break up spending into three categories:

  1. Variable cost spending which are linked to the product you sell
  2. Fixed overheads
  3. Capital spending which can range from basic new equipment purchases to new business acquisitions

The first category, I would say is in many ways the easiest to manage, yet it requires discipline.  By representing the costs associated with selling your product or service, assuming you have had a drop off in sales then you should be able to limit this spending. 

For many companies, it represents inventories and the common strategy across the world is to reduce your inventory to accommodate an expected reduction in future sales and also convert your inventory into cash and lastly to allow for purchasers of future inventory at reduced prices. 

In a service based business, it is recognising the productivity of staff.

One brilliant strategy I feel companies have used is to move staff to 4 days per week arrangements or request employees take periods of unpaid leave so that they can cover the short term financial and workload issue while retaining quality staff in the longer term and avoiding reputational damage.

The small business sector finds it much more difficult to implement the above strategies quickly but needs to do this.

The second category is fixed overheads being admin staff, IT, rent for the office, telephones, cars, stationery and marketing expenditure.

Some strategies to reduce the costs around these areas of your business include:

  • Consider buying consortiums between your business and other companies, this has the potential to increase your buying power on goods and services and save money at the same time.
  • Review your business services for scalability, meaning you should consider going to vendors that allow you to scale everything
  • Sub lease out spare office space
  • Review your service contracts and tender these contracts to other providers, some may be smaller firms or start ups keen to win your business

The final category is capital spending.

TAKING INVESTMENT OR CAPITAL SPENDING OPPORTUNITIES TODAY TO GROW YOUR BUSINESS

This space is exciting for businesses and many opportunities are popping up that would not have done so in the boom times.

You have an element of many Baby Boomer retirees now getting out of business meaning that acquiring aligned or competitor business at significantly more attractive prices is a great way to position your company. 

It may even involve attracting key individuals from your competitors and talent you would not otherwise have been able to afford on more reasonable remuneration packages.

You then have capital equipment tax incentives and price elasticity.

You have a period whereby others are not investing in research and development or new products to allow your own leading products to take a strong holding in their focused market; hence an advertising or sales push is needed.

The point I am making is that now is your chance to leap frog your business up to another level.

You need to shift your company while your competitors may not have shifted with the market and are not providing a competitive service.

As a minimum you should be:

  • Reviewing if the expenditure is really necessary and do you have the cashflow to cover this spending
  • Recalculating the benefit in line with your growth plans and is it a calculated benefit or a risk
  • Limit any risk taking until the economy is clearer – you can still take advantage of strategies but recommend not going overboard
  • Be prepared that any investment or capital spend that involves a risk may have bigger repercussions for your business in the long term

PRIORITISING YOUR SPENDING

There are a couple of fundamental concepts I use and that is “if i stripped this cost would it aversely effect the service or product for my client” and “if i cut these product ranges will it only make it more difficult for me to cover my fixed overheads” and lastly “increase spending on your value added areas and reduce spending on non value added areas”.

For example it may be counter cyclical to stop advertising in bad times as this may be detrimental to your business.

Lastly I would say focus your spending for desirable outcomes.  Where you do an advertising campaign make it focused, take for example large groups that have special 20-50% off campaigns.

HOW TO BETTER MANAGE YOUR CASH OUTFLOWS AND PAYABLES TO CREDITORS

There are a few key areas that a small corporate can do to better to manage their cash outflow and payables, these include:

  1. Understand your cash flow or operating cycle, particularly the time lapsing between the purchase and sale of goods/services and the ultimate collection of payment from customers.
  2. Extend payment and trading terms
  3. Using trade credit where available and calculate benefits for making prompt payment to your creditors.
  4. Increase your profits! And I do not mean your sales or gross margins. 
  5. MOST IMPORTANT OF ALL – Create a Cashflow Forecast

By reviewing and modifying your business structures and costs you are likely to improve profitability.  Be wary of cutting costs that may have a negative impact on your business, such as investment in staff, marketing or technology.

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