The early stages of building a business are among the most challenging. Often, you haven’t begun to generate significant revenue, and you have invested a lot into your growth. Cash flow may be tight while you await the anticipated ‘breakeven’ point. During this period, managing costs is essential in keeping things moving and preventing you from ending up in debt.
Once you get out of the early stage, cost management doesn’t stop being crucial. By continuing to manage your costs, you can get a consistent balance between your income and expenditure. With this, you can enjoy lower overheads and increased profit.
However, managing costs is often easier said than done – especially if you’re running your first business. Below, we’ve put together our top tips for cost management, so you can keep cash flowing.
- Keep records
- Conduct expense audits
- Balance your income and outcome
- Negotiate with suppliers
- Review your pricing model
- Promote financial responsibility
Keep records
You will already need to keep a certain level of accounting records in your business to comply with UK law. The purpose of these records is to make sure you’re paying the right amount of tax and avoid any fraudulent activity.
However, beyond this, keeping comprehensive records of your accounts enables you to see where your money is going each month. Every time you have a query about a specific transaction, these records should be a point of reference to identify what costs have been going out of your accounts and where to. This makes conducting audits much more straightforward.
Your records should include information about sales, purchases, receipts, payroll and any other payments or expenses. You should also use appropriate software to digitise your records, as this will make them more accessible, easily storable, and harder to lose, especially with the requirements of Making Tax Digital.
If you don’t have an accountant in your business, providers such as QuickBooks and Xero can make the accounting process more manageable.
Conduct expense audits
Once you’ve established efficient processes for accounting, you can use the records created to conduct audits of your business expenses. Holding audits regularly is key to staying on top of your expenditure and stopping it from getting out of control.
When recording expenses, aim to place payments into categories (for example, ‘stock’, ‘cost of goods’, ‘energy supplies’, ‘wages’). This will enable you to see how much you spend in every area.
If costs are rising in an area, explore why. If you’re undergoing a period of growth or increased demand, it’s natural for expenses to be higher. However, if they’re seemingly changing for no reason, it could be a sign of price hikes or lax spending control.
By conducting audits, you can focus on the cause of expenditure changes and work out where there’s room for manoeuvre – like cutting costs and eliminating unnecessary spending.
Balance your income and outcome
Cost management aims to keep your outgoing costs low so that they don’t outweigh your business income. In this sense, it’s a balancing act.
If your costs were higher than your revenue, it is likely to result in reduced cash flow, inability to meet payment commitments and eventually debt. So, you want the two to at least equal each other out. If your focus is building profit, your costs will need to be significantly lower than your outgoing payments.
When reviewing your expenses, you should gauge them against your income to check you have the right balance. This will allow you to spot when you need to make necessary cuts to prevent your business from running at a loss.
Negotiate with suppliers
Once you identify room for manoeuvre in your expenses, there are several tactics you can undertake to reduce costs. One of these is negotiating with your suppliers to get better terms.
If you stay with the same companies for an extended period – whether it’s suppliers for raw materials, goods or services for your operations – you might find that costs slowly start to creep up. This is natural in line with inflation, but there might be instances where you could be getting a better deal elsewhere.
Start by contacting your suppliers to find out if you’re on the best possible terms. Try to negotiate a lower price or even consider changing your contract or tariff (where possible) so that it fits your needs more accurately.
If your existing suppliers aren’t budging, shop around. New competitors enter the market every day, so you might be able to find out that suits your requirements but offers you more value for your money. In this case, it could be time to switch.
Remember, if you are switching suppliers, make sure there are no hidden fees around exiting your contract early, as this could counteract any savings you would make by moving.
Review your pricing model
Another way to manage costs is to make sure that your overheads align with your pricing model.
To operate successfully, you need to price your goods and services to be more than the costs it takes to provide those goods and services. The trick is getting a balance that allows you to make a profit but remains competitive to attract buyers to your business.
If the gap between costs and price is tight, you need to consider either increasing your price or reducing costs. Negotiating with suppliers will help with this to an extent, but it may also mean analysing how you produce your products and services – including whether you can switch to lower-quality supplies and cheaper processes.
Ensure that any pricing changes are thoroughly considered and sensible as to avoid alienating customers. You should also make sure the changes are well communicated to existing buyers.
Promote financial responsibility
A final step in your cost management mission is to ensure your entire business is on the same page. To do so, you need to promote financial responsibility as one of your core values.
Communicate the need to be careful with costs to your staff and the benefits of effective cost management. Encourage employees, especially department heads, to look at what they can do to help your business lower costs – which could include identifying more valuable suppliers, improving productivity, or limiting the number of expenses they submit.
It will also help to have designated budgets for each business function so that the leaders in that area know the threshold they should aim to stick to.
By ensuring everyone is aware of the importance of financial responsibility, you can cause a collaborative effort as your business seeks to manage costs.
Conclusion
Cost management is essential for any business that wants to maintain cash flow. In trying times, keeping costs down is critical to the ongoing operation of your business and reaching your breakeven point. In prosperous times, it’s essential to unlocking profitability.
By implementing suitable measures into your operations, including regular expense audits and communicating with your staff, you can ensure your business minimises overheads and identifies value for money in your processes.
If you want to maintain cash flow, external finance may also help alongside your cost management protocol. There are several short and long-term solutions on the market to help small businesses and suit whatever challenge you face.
To find out more about the funding options that can help or get advice on managing costs, get in touch with one of our expert advisors.