Adopting a prudent outlook can boost your bottom-line more than you’d think possible…
They say that what doesn’t kill you makes you stronger, so if your business survived the recession there’s no doubt you took away some valuable lessons. Putting into practice cost cutting measures and encouraging a savings mentality is perhaps the most crucial element in ensuring that your business can weather all storms going forward…
Tighten those belts
If you thought the expression above was limited to use in an economic downturn, think again. While we are not completely out of the woods, the world’s financial future is looking rosier than it did this time last year, and now is the time to review your operations and trim down on excesses.
As Robert Buys, Provincial Manager Gauteng of the Small Enterprise Development Agency (Seda) puts it: If you know the battery of your car is flat and you persist in driving around all day in it; don’t be surprised when the lights don’t work at night when you need them.
Conserving battery life will make sure you have some power to keep you going. In the same way, being careful with your expenses now will give you a buffer when times are tough.” Buys suggests small businesses reduce costs in the following ways:
Collaborate for stronger buying power
Small businesses need to install a culture of working together, Buys advises. While the idea of collaborating might not come naturally to everyone, there are huge savings that can be made.
“An example would be a small enterprise in Secunda that needs to transport in limited raw materials from Johannesburg. Rather than bearing the cost of truck hire themselves, they can collaborate with two or three other businesses who have similar needs; thereby effecting big savings for all parties.”
Buy in bulk
Seeking out suppliers who provide for bulk purchases can impact the amount small businesses spend on their input materials hugely; due to the significant reductions on per unit price that can be negotiated. Eric Parker, partner at Franchising Plus, and author of well-known entrepreneurship titles like Eric Parker’s Road Map to Business Success, comments that the time has never been better to negotiate good deals with suppliers.
Take advantage of the opportunity by securing extended terms, or getting them to assist in your marketing, says Eric Parker
Adopt just-in-time inventory practices
“Produce for supply”, that’s the key phrase Buys has to offer businesses. “Stock management costs are high; not to mention the space that excess stock takes up – working out how to managing one’s supply chain effectively will cut costs in a big way,” he explains.
Rent common space
Small businesses should try to save on rental costs by working out of a shared office/factory space. Partitioning the space with dividers will allow for increased/reduced space in line with the changing needs of the businesses involved.
“South Africans just have no concept of how to utilise space efficiently,” comments Parker.
“There is also nothing wrong with working out of town, where office rentals are lower. You can always move back to the CBD when you’ve built up a rental savings account.”
Concentrate on your core competencies
“If you are in the business of making bricks, just make bricks,” Buys says. “Don’t try to make wall fences too – you just don’t have the expertise,” he expands the illustration. While it might be tempting to diversify your efforts, there’s a lot to be said for focusing your knowledge and becoming an expert in one niche area.
Spend to save
You might be inspired to trim down on every area of your business, but experts warn against being pennywise across the board. Here are certain aspects where spending can actually boost your bottom-line:
Invest in expert labour
Many small business owners think to themselves, “I can do that myself!”, and try to save on labour costs.
What they don’t see, Buys points out, is the amount of time lost; time that could be better invested, for example, in seeing clients. There is also the possibility of misunderstanding the level of skill involved in certain tasks; and ending up with a less-than-satisfactory end result that took triple the amount of time it would have taken an expert. Parker suggests investing in fewer employees, who are skilled and hence more productive, rather than a large, low-skilled workforce.
Attend networking events
Sometimes subscribing to and attending industry and networking events can seem like a waste of money and effort. Not so, emphasises Buys. “This is where you will get to talk to different people, be exposed to new ideas and expand your network and infrastructure.” Don’t cut this cost. In a similar vein, Parker urges small businesses to not stop marketing during tough times. “This is when you need to be more aggressive than ever – adopt a hard-sell approach and tailor your marketing offer to meet the needs of the equally cash-strapped customer.” An example of this in the food industry, he says would be introducing a “lighter” meal option; which reduces your cost and also provides the customer with an alternative to not eating out at all.
Protect the business against risk exposure
“Buying protective boots for your factory staff is a lot cheaper than dealing with medical costs in the event of an accident; not to mention the losses resulting from time away from work,” says Buys. Small businesses should not try to cut any costs that put their venture at risk. “A fire extinguisher is not a waste of money, and neither are your insurance costs.”
Buy right
Always invest in quality raw materials, says Buys. He maintains that you might save R10 on an input, but if it is of inferior quality it will ultimately cost your business thousands. He also advises on the importance of selecting reliable, reputable suppliers.
A savings mentality
When it comes to creating a savings mentality in your business, it’s all about developing the habit of setting aside money.
Buys explains two often conflicting determinants on how money is spent: what the business NEEDS, and what the owner WANTS.
“A lot of it comes back to proper planning for your business. If you have a robust plan; you’ll know exactly how much cash you need to plough back in, and how much you can put away and invest,” Buys says.
“That’s the real problem,” agrees Parker. “Businesses fail to plan and don’t realise they need savings until it’s too late.” He emphasizes the need to constantly evaluate your business plan and assess where you’re at; and think of innovative ways of being more efficient. Eagle Pizzas in Australia, for example, realised that on the whole, people ordered pizza after 4pm, and while it was a bold step, they decided to cut their afternoon shift completely. “It was a case of looking at income and expenditure rationally, and deciding where savings could be made,” Parker says.
Out of sight
Where you put your savings is completely up to you, but make sure it’s not easy to get hold of.
Buys advises that surplus cash be put into a 32-day call account; which is not easily accessed and enjoys higher rates than your normal business account. “If you put it in your back pocket, you’ll end up spending it, regardless of how disciplined you think you are.” Parker says it’s worth investigating stock exchange options, particularly players in the same industry as your business. “That way you’ll be familiar with how things are going and who’s worth investing in.” Parker mentions the money could also be used to expand the business, provided that the time is right for expansion.
Buys also warns against the temptation of using extra money to grow your business too fast. He uses a picture that’s close to home: “Imagine a family dinner where one greedy boy takes a huge piece of pap and puts it in his mouth. He can’t do anything with it; he can’t swallow and it’s too big to spit it out. So there he sits with his mouth full, doing nothing, while his siblings tuck in and finish the meal around him.” Don’t rush in and spend all your extra cash on growth. A healthy savings account is just as necessary.
There are cases when you need to spend; bearing in mind long-term savings. An example would be spending money on a reliable car rather than scrimping and only forking out enough for an old one. “It will no doubt cause you endless trouble and the maintenance alone will eat into your savings,” Buys says.
Tough as it’s been, the recession has been instrumental in forcing business owners and consumers alike to shift their attitudes from one of credit and waste, to a better understanding of the value of money and what it takes to build real wealth. Hold onto that understanding firmly, even when the good times roll, and you’ll always have a financial cushion to make for soft landings.
Published in Your Business Magazine
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