As a small business owner, you will know that in order to make a profit, you have to bring in more in revenue than the business is costing you. The math itself is fairly simple, although working out costings can be a laborious process, and predicting sales is never going to be an exact science. One reason that businesses fail to achieve the profits they forecast is an underestimation of running costs or a lack of rigor in keeping day to day costs as low as possible. There are many influencing factors that can affect your business’s cash flow, but one that is well within your ability to keep control of is saving money on running costs.
Creating a budget
One of your most important tasks when setting up a small business is creating a budget. To confirm the viability of your business, you need to have a detailed breakdown of all the costs involved, and a realistic profit projection to demonstrate that the venture is sound. A budget allows you to calculate the investment you will need from third parties and provides them with evidence on which to base their decision to invest. Any mistakes in the calculations you use when preparing your budget will distort the predicted revenue to profit ratio and could lead to financial difficulties down the road. However, even the most well-constructed and accurately calculated budget still relies to an extent on prediction rather than verifiable facts to reach a conclusion regarding potential profitability. Any number of factors can affect the budget after its creation, including unforeseeable changes to the market, supply, costs, legal requirements, competition, and operating problems. There’s no way of being one hundred percent accurate with your predictions, but inputting the best available data and ensuring you have a reasonable contingency fund will give you the best chance of weathering any dramatic changes in the progress of your business.
Operating costs
You will have two kinds of costs, those that are known as fixed such as rent, rates, and an Internet connection, and those that are termed variable, like purchasing costs, packaging, and shipping. Of course, rent, utilities, and other fixed costs aren’t set in stone and may change, but they are not influenced by sales volume. Individual packaging and shipping costs may remain fairly constant but will vary according to the number of items you are dealing with. Therefore, you should never assume that the deal you have at present is the best one for any costs you incur. For example, you start off in your business using a fairly small quantity of packing materials each month which you source from a business consumables company at an agreed per unit rate. A year down the line, your business is using four times as many packing materials, but you are still paying the same per unit rate. If you don’t check what you’re paying out on these regular expenses, you could end up losing hundreds or thousands of dollars by paying more than you need to. This principle can be applied to all your costs, however large or small. By regularly checking for better prices and negotiating with your current suppliers, you can cut many of your operating costs quite easily.
Taking advantage of free services and tools
For most online services that cost you money, there is likely to be a free version available. This is true of many kinds of software, from word processing and spreadsheets to content management systems and stock control. Making use of free tools is a great way to save money, but you need to follow a few simple guidelines to ensure this software will work for you:
- If you find a free tool, you need to, first of all, check that it is legitimate and comes from a secure and reputable source. Loading malware into a freebie is an ideal way for those with a malicious streak to get into your systems and disrupt your processes or hold you to ransom.
- Once you’ve confirmed that the software you’re interested in is genuine, find out how much functionality you get in the free version. You will often find that the free package has far fewer functions than the paid for versions. This is only a problem if the free package doesn’t include what you need, but in many cases, the free or very low-cost versions will perform all the tasks you require for your small business.
The range of tools and apps available covers most business functions, so it’s worth looking for free software before signing up for a more costly service. For instance, if you use timesheets for your employees to record their hours worked each week, you could save money and make the process more efficient by transferring to a free time card calculator app. If you want to see how this would help streamline the process and give you more accurate and useful records, check it out!
False economies
There are sometimes good reasons for spending more on certain items when the quality of cheaper products is below that which you require. For instance, buying cheap parcel tape can be a false economy, because it will tear, taking longer to apply; it will need extra strips to make parcels secure, and there could be less on the roll in the first place. That’s why you should always compare prices per length or weight, as appropriate to what you’re purchasing. Compromising on quality in raw ingredients or using a cheaper supplier who fails to deliver your orders on time will end up costing your business far more than sticking with a higher quality product or more reliable supplier. The trick is to know when you will save, and when it’s not worth it.
Investing wisely will save you money
If you’re looking for ways to save money, don’t make the mistake of cutting your investment into staff and systems. It can be tempting to see investment in new machinery or staff training as an expendable cost, but if you look at the bigger picture, you’ll see that making well-judged investments will increase your profitability in the longer term. Equipment that is inefficient, prone to faults, or takes up more staff time to operate than a newer version will affect your productivity and therefore cost you sales. Staff who don’t have the training they need to perform to their optimum capability and feel that you do not value them, will also fail to be as productive as they could be, again costing you sales. A business that doesn’t adapt and change over time will stagnate; what it needs is to be given regular upgrades and to stay in touch with the changes taking place in the industry and the rest of society.
Spending when you don’t need to
It can happen that in your efforts to save money and invest in your business, you fall into the trap of paying for software and systems that you don’t in all honesty need. For instance, a clever marketing campaign might persuade you that using an online collaborative teamworking system could improve your efficiency and help your staff work co-operatively. These kinds of systems can be very useful in certain situations, but you should ask yourself how you will benefit from such a system in your small business compared to sticking with simple email functions. Does your team need state of the art laptops or tablets to do their job well? If they do, then the investment is worthwhile; if they don’t, it’s just an indulgence that is reducing your net profits.
Saving the pennies
It’s surprising how much money your business can waste with all the small, regular expenses it incurs. Leaving lights and computers on when they aren’t in use is a classic example of actions that may cost very little each day, but cumulatively could add hundreds of dollars to your energy bill. Ordering more stationery than you need each month, so you end up with a paper mountain or boxes of glue sticks that are starting to dry up is another common problem, as is the failure to manage the storage of stationery and consumables, so items aren’t hoarded or misplaced. Just ten dollars a week wasted will add up to over five hundred by the end of the year, and that’s an amount a small business can’t afford to be losing. You don’t want to be seen as a nag or a miser, which will not endear you to your staff, but you could make someone responsible for managing the stationery, and provide a positive incentive to staff to help reduce waste and save money in the office.
Saving money in a small business is important if you want to achieve maximum profitability. Some methods of cutting costs are easier to manage and implement than others, but if you can engage your staff with the reasoning behind making economies in certain areas, you could well find that they will become enthusiastic adopters. Finding the balance between saving and investing will ensure your business grows and flourishes, so start thinking about the best methods of cutting costs in your company.
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