Having a reliable forecast of income and expenditure is essential for positive business results.
It's a well-managed budget. But what about when income and expenses occur and there is a lack of capital? When some customers delay payments? Cash flow is the essential tool for analyzing these situations. And reducing costs is a way to improve a problematic cash flow and often save the business!
The budget is the main tool for defining where resources will come from and in which expenses and costs they will be invested. However, there is a management tool that, unfortunately, many entrepreneurs and their managers do not prioritise on a daily basis, but which will make all the difference in achieving profitability: Cash Flow.
It is a fundamental tool for managing the capital that circulates in the company and defines its financial situation at any given moment – whether we can grow, should maintain the status quo, or perhaps get our house in order.
Where is your company at right now? Or is it facing problems with its cash flow? The solution may lie in reducing costs!
But first: do you know what Cash Flow is?
If you are unsure, the good news is that this is more common than we think. In fact, many people see the Budget as the key to success, if we stick to it.
This is partly true. Effective budgeting is the way to start on the path to profit, but in the real world, revenues and expenses are spread across different areas and are subject to a wide variety of day-to-day unforeseen events.
Cash flow is the tool used to manage this reality – while the budget is a set of definitions, cash flow is the practical result of the application of resources in investment, expenses and costs, and the receipt of sales.
And it can show the reason, when it eventually happens, why despite sales reaching their targets, there is no money left at the end of the month.
And how should we manage Cash Flow?
The main factor for good Cash Flow management is the frequency of control, and the ideal for all companies is daily.
This may seem excessive, especially for companies with few events, but it is still the best way to anticipate any problems or make quick decisions in unforeseen circumstances, especially in the beginning and if you are implementing it in a high-attention scenario.
How to implement and update a Cash Flow?
- There is no single way to control it, we can use a well-structured spreadsheet or a system. The important thing is that it is easy to make records and quick to show the results;
- Create a record of income and expenses with budgeted and actual amounts;
- Record the opening balances of all current accounts;
- Record the budgeted amounts for expenses and income per month;
- Record each expense paid – all of them – by type, amount and payment date;
- Record each income with the same information and forecasts for each sale made.
With these initial and daily updates, we have a Cash Flow that will indicate whether the expected profit at the end of the month will be confirmed and whether we will have a negative balance on any given day – and anticipate measures to avoid financial losses and growing imbalance.
Cash Flow Problems: how can we analyze them?
Of course, cash flow can become negative due to a specific situation – a customer delaying payment, for example – which is natural in the day-to-day financial life of a company. However, if this happens repeatedly, there are some important questions to ask before taking action:
Have all customer payments been received?
Default is an inherent risk, especially in unstable economies such as ours. A difference between the forecast and the actual can sacrifice a month's profit. It is important to assess each case individually and determine the risk of it becoming recurrent.
Were there any unexpected expenses?
In this case, it is necessary to understand the cause and whether it could happen again – for example, a lost labour lawsuit that was not provisioned for will require a review of targets, depending on the impact of the amount, but it is a one-off event.
Do negative balances occur on specific dates and on a monthly basis?
This may mean that some expense or cost has a payment term that is incompatible with receipts or was poorly budgeted.
Other questions may arise, which is why daily monitoring is important to identify the causes and find solutions as quickly as possible.
Reducing costs by improving cash flow
Cost review is a very effective way to balance the "income vs. expenses" ratio and restore healthy cash flow.
1. Outsource services
Outsourcing is a great option for reducing costs in sectors that are not directly related to the core business activity.
We can replace a dedicated structure, with which we do not have the necessary experience to achieve the best results at the best cost, with a company that seeks maximum efficiency, as this is its core business. Areas such as security, cleaning, and various types of maintenance can be outsourced, seeking the best price and quality among companies in the market.
An important cost is freight, if your company uses its own transport. Companies have the know-how and focus on a constantly changing market, and are better prepared to provide a good service at a lower cost.
2. Invest in Crowdsourcing
Crowdsourcing is a resource where your company registers on websites where it can request services and various companies will make their proposals. It is widely used for various expenses and costs that are not related to production, and can represent considerable savings – IT services, maintenance, consulting and others.
3. Check inventory levels
You may have high inventory levels due to lower-than-expected sales, imbalances in purchasing processes, inaccurate inventory, etc. If these are slow-moving items, consider returning them to the supplier, repurchasing them at a special price, or offering sales promotions.
4. Renegotiate prices
Taking the list of products and suppliers and attempting renegotiation is always an interesting alternative, especially if there are competitors with compatible qualification levels. In some cases, you can renegotiate for a fixed term to restore the health of your cash flow, due to your good relationship with the supplier, and return to the previous condition.
5. Invest in Cost Management
Cost Management is an important concept in companies today – having control over expenses and costs as company policy, with an action plan, strategies, measurements and involvement of all areas. This way, it is possible to act in a structured manner and obtain gains in all sectors.
6. Review production costs
This is a sensitive area, where any change can impact product quality. However, as this is where your business invests the most, it is worth evaluating new suppliers of inputs or components to seek better prices or payment terms.
7. Review company processes
We often carry out processes in an inefficient manner, with overtime or more expensive supplies from suppliers. It is interesting to focus on the most important processes – especially manufacturing – and assess whether they are excessively costly and seek a new way of doing things.
Other measures that can improve cash flow
In addition to reducing costs, other long-term measures can rebalance cash flow and restore positive results.
1. Renegotiate payment terms
Faced with a drop in sales or defaults, we need to review the payment terms of suppliers to restore the health of the flow. Assess the terms that can be revised – higher expenses and costs.
2. Listen to your employees
Employees experience day-to-day operations and can identify what may be wrong with processes, which ends up generating unexpected additional costs. Listening to them and engaging them is a great way to motivate teams to support the decisions that are made.
3. Reassess your budget
Often, figures were budgeted in a context different from the current one. Reviewing your parameters will help you create more realistic scenarios to find the most viable solutions.
4. Constantly analyze the profile of your customers and potential customers
Depending on your customers' profile, you can change your sales and payment strategies – larger instalments, discounts, promotions, more payment options. If appropriate, this can result in incentives to purchase and reduce the risk of default.
As we can see, well-managed cash flow is essential for the financial health of the company, to preserve and avoid unexpected losses.
ERA Group, una consultora internacional especializada en gestión de costes, cuenta con una metodología de eficiencia reconocida y con profesionales cualificados con experiencia en el sector.
Want to know more? Schedule a no-obligation meeting with a specialist and transform your company.
