May 2021 | Servcorp
Cash flow management is crucial for the day-to-day running of your business. Managing overheads and reducing costs can make a huge difference in your balance sheet.
If you’re a new business or struggling to identify ways to improve your cash flow, one of the first things to look at are your expenses. As your business grows, your costs will too, so it’s vital to keep on top of your businesses cash flow and continually find ways to reduce your overheads for healthy cash flow.
What are the overhead costs?
Overheads are costs that are associated with your business, but that doesn’t directly add to your business’s products or services, which can also be known as indirect costs.
There are many types of overhead costs for small businesses, including insurance, administrative fees, professional expenses, licenses and permits, property taxes, utilities, rent payments, office equipment, and more.
While these costs are essential to the running and success of your business, they don’t have a direct effect on your profits. So, costs you can gather alongside overhead costs include:
- Accounting fees
- Legal fees
- Labour burdens
- Phone and internet
- Travel expenditures
A straightforward way to reduce these overhead costs is to reconsider the office space your company needs. Business owners are guilty of renting commercial spaces that are much too large for their companies needs. So instead of signing that new lease consider other options such as renting flex Office space with a variety of options such as coworking space or virtual office.
What is cash flow management? And why is it essential for my business’ finances?
Cash flow management is the difference between inflows and outflows. In short, it’s the amount of money that comes in and out of your business.
Think of it as a water tank. Water comes in at the top and drains out at the bottom. To keep your tank nice and full you want to keep that cycle continually moving, with more water coming in than going out.
Improving your cash flow not only makes it easier to plan and budget allowances for your business but allows you to handle the daily fluctuations within your company efficiently. It’s vital because it later becomes the payment for things that make your business run: expenses like stock or raw materials, employees, rent and other expenses. Positive cash flow means your business is running smoothly.
From staying on top of accounts to extending lines of credit, there are several ways to improve and increase your business’ cash flow, including:
- Pricing - lift your prices, focus on profitable revenue streams and provide more value for customers.
- Volume - increase your customers, expand into new markets or develop new products/services.
- Accounts receivable - invoice earlier, follow up frequently and reduce payment terms.
Creating a high positive cash flow and perfecting the above areas can become even better for your business and will allow you to make new investments and further grow your business.
How to reduce overheads and improve cash flow.
First and foremost, it’s important to review your current overheads to see where you can reduce costs.
Try to aim for a balance between efficient spending and cutting waste. Question what expenses your business can do without or whether there are better, more affordable options.
For example, when your insurance renewal comes in before committing to another year shop around and gets a few quotes from other insurance brands, it could help contribute to cutting those overhead costs. Negotiate with suppliers for upfront pricing or better deals is also another easy step to reduce costs.
Sometimes calculating these costs to find out where you can make cuts can be difficult, especially as most overhead costs are fixed on a month-to-month basis. But there are ways that you can reduce costs in these areas and give you business a more considerable profit margin and help to keep your cash flow healthy.
- Closely inspect all costs–review all of your overhead costs, especially ones that are too expensive or unnecessary. Once you’ve identified an overhead you can reduce, such as a license you no longer need but are still paying for, cancel it.
- Outsource– consider the positives of outsourcing within your business. If you are hiring someone for tasks such as accounting or tax preparation, consider outsourcing to third parties. This can reduce employee-related costs like health benefits and pension and means you might be able to make fewer employee cuts.
- Embrace remote working– From utility bills to monthly rent, many of your overhead costs are likely to be linked to your physical office. Remote working is increasingly popular, and by shifting to a remote work culture, you significantly reduce your overheads and put your business in a great position moving forward.
- Reconsider software upgrades– There’s very little cost gain value for computers and software, if your employees require the latest upgrades, think about scaling back. Rather than presenting expensive software across your entire team, it may be more cost-effective only to purchase licenses for employees who need them to do their job.
- Go paperless– Although it may not seem like a major expense, paper and ink add up. Try looking for paperless alternatives to traditional business processes.
Why it’s essential to keep check of financial matters in 2021.
With the current pandemic forcing businesses to close both temporarily and permanently, it’s important to be on top of your cash flow and overhead costs. You might have to be prepared to take some short-term measures to cut your business’s expenses and to monitor any overheads closely.
During the coronavirus pandemic, business owners are seeing just how vital it is to both actively monitor daily overheads and effectively balance incoming and outgoing cash flow to stay afloat and reflect their operating environments.
Ultimately, learning how to reduce costs and mastering your cash flow management comes down to planning and creative thinking. With the right advice and processes, you can ensure your business sails through the next 12 months with confidence.