We’ve said it before, and we’ll say it again – cash is the lifeblood of every business. Without money flowing in, you are dead in the water. But how do we ensure that there is enough cash circulating? Cut costs and overheads and increase sales in order to maximise profit.
What is profit and how do you calculate it?
In short, profit is revenue minus expenses. Profit is the amount of money you have left once your total costs and expenses have been deducted from your income. Obviously, the higher the number the better, and you should always aim to maximise profit. If your costs are higher than your income, however, then you are running at a loss and the end is in sight for your business venture.
Why profit is important for your cash flow
Cash flow represents the cash coming in and flowing out of your business. When cash going out is subtracted from cash going in, you are left with net cash flow. Profitability represents the income minus the expenses, fixed and otherwise, of your business. When expenses are subtracted from income the resulting number shows your profit.
Cash inflows and outflows show liquidity while income and expenses show profitability. Liquidity is a short-term phenomenon: Can I pay my bills? Profitability is a medium-term phenomenon: Am I making money? Needless to say, profitability in the long term is where it’s at.
How to Cut costs and improve profit
It sounds simple, right? Cut costs and have more money in the bank. However, the reality can be more complex, as you do need to spend some money running your business, and some input costs are unavoidable. It’s all about money in AND out and finding the ideal balance that allows growth.
Reducing costs doesn’t simply mean cutting spending to the bone and leaving it at that. You need to understand the nature of each cost and its relationship to your company’s sales and profits, and learn to spend – or save – wisely. Here are 6 sensible ways to cut down on expenses and ultimately boost your profit.
- Lose the brick and mortar: Look at your office space – do you really need all of it? In these days of hybrid or remote work, why not consider moving to a smaller office space. Or better yet – go completely online and outsource some activities. This will mean a smaller payroll and more flexibility to call in experts as and when you need them and your budget allows.
- Cut the luxuries: Small expenses add up, so take some time to really examine where your money is going. Do you really need to order lunch every day, or could that money go to marketing? You want your money to work hard in your business, not spent on ‘nice to haves’, so be strict with yourself and your staff.
- Get better pricing on your raw materials to cut production cost. You can try negotiating terms with your current supplier or finding a new one that can offer the same quality at a better cost point. You may be able to get better pricing if you buy in bulk or agree to pay within a certain time.
- Improve your turnover time. Carefully examine your production system, and make changes and improvements where possible. The faster you can produce a product or service, the faster you can generate an income from them.
- Invest in new technology to improve efficiency and productivity. Take a look at your current administrative processes and identify areas or tasks that could be automated using technology, instead of manpower. The digital age is upon us, so invest in software packages that save time and money in the long run. You might even be able to cut down on staff in the process.
- Oustource and lighten your payroll: Outsourcing gives you access to a skilled and low-cost pool of talent without having to hire someone full-time to do the work. From the financial function to customer service, outsourcing is a flexible way to bolster your capacity without increasing costs and pushing up the overheads.
Outsourcing with OCFO
Outsourcing is a quick, flexible, and cost-effective solution to both mundane, repetitive and time-consuming tasks as well as highly skilled tasks that your staff might not otherwise be able to handle. When you outsource, you convert a fixed cost (a full-time salary) into a variable cost (a pay-what-you-need service). This frees up your cash flow to work hard in other areas of your business where it’s needed most.
If you decide to work with a team of financial experts, such as Outsourced CFO, we can help you examine current operations, identify any gaps, and show you where you can accelerate your cash flow and cash conversion cycles in order to maximise your profits. Click here to read more about our Cloud Accounting packages, or reach out to our team for assistance.
Careful management of unnecessary expenses and overheads and attention to liquidity will see your business through any crisis. Contact OCFO by visiting www.ocfo.com
Video: 6 Ways to Reduce Overhead Costs
More Info on 6 Ways to Reduce Overhead Costs here: https://www.ocfo.com/cloud-accounting/packages/
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