It’s the age-old predicament almost every small business owner will grapple with at some point: You want to be savvier about business spending to improve cash flow and boost profitability, and yet, you don’t want to cut costs so much that you compromise your ability to meet the needs of your staff and consumers. But as the global economy continues to reel from the novel coronavirus pandemic—with small businesses bearing the brunt of the impact—it’s no longer a question of if you should cut costs, but how.
As state and local governments order nonessential businesses to close and advise the public to stay home and maintain social distancing measures for at least another month, small business owners are facing some tough decisions on how to make payroll, pay their bills and stay the course over the next few weeks. And although the federal government has made assurances that relief is on the way with the recently passed stimulus package, it’s still a good idea for business owners to take a closer look at where they can cut costs (without losing great employees) to better position themselves for when they can welcome customers through their doors again.
Even during non-pandemic times, finding ways to reduce business spending can seem like a time-consuming endeavor for business owners who were once more preoccupied with growing their enterprises and generating revenue. But the effort can save you money in the long run—and in, unsettling times like these, possibly your business.
No matter what’s going on in the world, poor cash flow management is a top reason why many small businesses fail. Indeed, 82 percent of small businesses end up shuttering because of it. Overspending can play a large role in cash flow problems, which is why putting processes in place to help you be more cognizant about expenditures is critical, says Meru Hunter McMahon, a cost reduction adviser and founder of Your Savings Pro, a Texas-based consultancy that offers expense reduction services to businesses.
And in the event of an emergency, such as the current global health crisis, you will be relieved you took the time to bolster your cash flow.
“People are easily willing to spend money versus taking the time to do cost reduction or process improvement,” says McMahon, who has experience in corporate supply chain management and contract analysis. “Many small business owners are doing it all. They don’t have time for certain things. However, those little things might be affecting their bottom line.”
Through years of working at Fortune 500 companies such as Chevron and Entergy, McMahon discovered she had a knack for negotiation and a passion for eliminating wasteful spending. She wanted to extend her expertise to others, especially small business owners who don’t necessarily have the budget to hire additional employees or pricey consulting services for cost reduction projects. That’s how Your Savings Pro was born.
Apply the 80/20 rule to identify what are your biggest expenses. From there, you can identify if there are any inefficiencies and areas you can cut down on costs.
“Negotiating is in my DNA,” says McMahon, who also volunteers as a SCORE mentor in the greater Houston area. “I enjoy this: Seeing results and helping people to reduce their costs so they can reinvest those savings back into whatever they need, whether it’s marketing or buying new equipment to increase their profits.” Or, in today’s case, surviving a major loss of revenue during a pandemic.
Here, she shares five tips to help small business owners get started on their money-saving journey at any time during the life of a business.
To some, it may sound like a no-brainer, but developing a solid business plan is the first step any entrepreneur should take on the path toward efficient cash flow management and budgeting for expenses, including during an emergency. A well-thought-out business plan lays out the vision for your company and helps you formulate a roadmap to execute both short-term and long-term growth goals. As such, you’ll be able to more tactically prioritize your business needs (e.g., what assets/resources you require and when, or how many employees you need to hire and why) and make proper cash flow projections.
“New business owners tend to get really excited, and what I noticed is they start acquiring services and products right away that won’t add value to the long-term success of the business,” says McMahon. For example, she continues, “If I want to open a pet grooming business, I have to understand my business, how I want to grow, what equipment I need. I don’t want to just buy all of this fancy equipment for thousands of dollars without knowing how many clients I would need a month [to reach my desired income], things like that.”
Creating a business plan will help you brainstorm “what if” scenarios, she says, which in turn, can help you establish smarter spending strategies from the get-go. McMahon also recommends reaching out to nonprofit organizations like SCORE that offer free guidance on business plans and much more.
The Pareto Principle, commonly known as the 80/20 rule, is often bandied about in business. It basically postulates that for any given event, 80 percent of all results come from just 20 percent of the action. If you apply this principle to analyze your business spending, says McMahon, you would likely find that 20 percent of your expense categories make up 80 percent of your costs. Consequently, by identifying those top expenses, you get a clearer picture of any inefficiencies, where you might be spending needlessly, and where you can make cuts and improvements.
It’s all about building awareness, says McMahon. Are you spending in areas that are adding value to your business? Or are you spending too much on things that aren’t necessarily helping your business grow, such as expensive coffee for the office? Have rates from your suppliers crept up over the years? Could you possibly renegotiate a better contract with some of them?
Simply being aware can put you on track to finding solutions that align with your business needs and goals. Once you establish a process to analyze your expenses, McMahon suggests doing a monthly or quarterly review to make sure spending stays under control.
Let’s say your spending analysis revealed that you’ve been paying increasingly more to suppliers over time for products or services. In this case, it never hurts to try to renegotiate your contracts. Your suppliers will likely be more understanding during this time, as well. But in normal times, the best way to negotiate is to do research so you can understand the market.
“I know a majority of times, small businesses will just agree [to a supplier’s price increase] because they can’t argue. You can’t argue when you don’t have data,” says McMahon. “With knowledge, you will empower yourself to negotiate better.”
To illustrate this, she shares the story of a business owner who was being overcharged for the service and maintenance of the business’s vehicle. “When the owner asked for a price revision, the supplier gave a lot of funny stories [for why] the price cannot move,” she described. After doing some market analysis, the business owner asked the supplier for a documented breakdown of the cost, saying that if they could justify the price, he would pay it. Ten minutes later, the supplier called offering a 20 percent discount.
“It’s very simple,” says McMahon. “Ask suppliers for a documented breakdown of their cost. If they don’t give it, then they should give you a discount. If they do give it, then you have a very powerful tool to start your negotiations and get your price reductions.”
The tool she’s referring to is the Producer Price Index (PPI), which, according to the U.S. Bureau of Labor Statistics, measures the average change over time in the selling prices received by domestic producers for their output. The index doesn’t show the actual price of the goods or services in question, but it does show the movement of the price as a percentage compared to the previous period, which is typically on a month-to-month basis, explains McMahon.
“Ask suppliers for a documented breakdown of their cost. If they don’t give it, then they should give you a discount. If they do give it, then you have a very powerful tool to start your negotiations and get your price reductions.”
“With the detailed breakdown you get for the cost of any goods, determine what’s the current price movement,” she says. “If the supplier quoted you a 2 percent increase in the price of that product/service from the previous period, but the PPI only increased 0.5 percent, then you’ve been overcharged.”
On the other hand, if you’re searching for new products or services, be sure to get at least three bids from prospective suppliers, and, again, understand market rates and choose the best contract based on your business needs.
Of course, you can also try to head off gratuitous price increases by creating better partnerships with your top suppliers. And it can be as simple as building in a quarterly, or even yearly, review with them to discuss any areas where you may need assistance or ask questions about their products and services. This signals to the supplier that you’re not just signing a contract and forgetting about it.
“‘Trust, but verify’ is a proverb I use a lot. You have to trust the partnership you build with your suppliers, but you have to verify,” says McMahon. “In my experience, the suppliers feel valued and are more willing to help you keep your cost down when you do review meetings with them. They may even [give you suggestions] and say, ‘Hey, by the way, there is a new thing coming up, and we can save you money here.’”
By maintaining a close partnership with them, you let your suppliers know you’re staying on top of things and understand what’s going on. But if they don’t think you’re paying attention, that’s when the prices could start creeping up, McMahon says.
Businesses of all sizes employ a range of products and services in their day-to-day operations, from payroll software, to office supplies, to shipping. Since small businesses don’t need the same volume of goods and services as bigger companies, they typically don’t enjoy the same “bulk” pricing as their larger counterparts.
But there is a way that small businesses can achieve those coveted cost savings: by leveraging group buying, something McMahon advocates for and participates in herself as a small business owner.
By combining the collective purchasing power of their members, group purchasing organizations are able to get manufacturers to offer products and services at significantly discounted rates. For some small business owners, participating in group buying can add up to thousands of dollars in savings a year. “It’s kind of like going to Costco and buying that volume of food,” McMahon says, adding that group buying is also a great networking tool to build relationships with other local business owners and utilize each other’s services.
Even so, some people may not see the big-picture value in saving small amounts here and there, but it accumulates. “If you combine all this money you save throughout the year, it can add up to be thousands of dollars that you can invest,” she says. Because profitability is more than just increasing revenue—in order to grow, you have to “stop the leaks,” too.