Managing expenditure

The best way to earn a buck is to save a buck. There are various smart business practices you can use in order to make sure that you’re keeping overhead and operational costs to a minimum, thereby increasing your profitability. Below are some techniques to help you become penny-wise:

  • Becoming a member of a trade/industry association: Get a hold of the financial standards for your industry and compare your situation to the industry norms.
  • Determining areas where you can cut back: Take a look at all your expense statements and try to analyse if you can cut back in some areas. Identify those loose ends which may be tightened – but remember, you don’t want to compromise on quality.
  • Create/join a buying group: When you purchase raw material in bulk, its usually available at large discount prices. Small businesses don’t often have the financial liberty to make bulk purchases, so it’s a good idea to get together with other businesses and form a buying group. You can work together instead of in competition, and purchase raw materials in larger quantities at lower prices.
  • Analyse the costs of inventory: It’s a good idea to calculate your inventory turnover ratio which acts as an indicator of the health of your business. This ratio is simply the cost of sales over a given period of time divided by the cost of inventory. A low ratio indicates that you may be spending too much on inventory costs and may want to cut back in that department.
  • Changing your payment terms: If you’re using a contract, you may want to change the terms of agreement involved. Instead of receiving the complete payment at the end of a stipulated time period, you may want to receive instalments at regular intervals. This will keep your incoming cash flow dynamic.
  • Expanding and diversifying: Spreading existing operational costs over larger sales volumes by expanding the business is a good idea. Just make sure you bear in mind any additional expenditure that may come along as a result of expansion. You may wish to undergo vertical diversification by expanding the channel of distribution of your goods or services, or horizontal diversification by increasing your product or service offering.  The idea is to create new business opportunities.
  • Risk management: Risks are unexpected expenses that may be incurred by various unfortunate externalities. While it’s not possible to predict the future, undertaking detailed risk analyses by identifying possible mishaps that may occur is probably a good idea to help you plan better and avoid additional expenditure. Possible risks may include lawsuits, patent infringements, personal problems, bad creditors, supplier breakdowns, and physical damage of goods.