Running a business costs money.

There are always costs, overheads and supplier bills that mount up – and these expenses will gradually chip away at your cash position, making it more difficult to grow and make a profit.

So, what can you do to reduce your spend levels? And what impact will this have on your overall margins, profits and ability to fund the next stage in your business journey?

Getting proactive with your spend management

Spend management is all about getting in control of your expenses – and, where possible, aiming to reduce the level of costs and overheads that you incur as a company.

Excessive spending eats into your cashflow, reduces your profit margins and stops you from achieving the profits that you’re capable of as a business. So if you can get proactive with your spend management, you can actually make your company a far more financially productive enterprise – and that’s great for your overall business health.

So, what can you do to reduce spend and slim down your company expenses?

Here are some key ways to reduce expenses:

• • Reduce your overheads – your overheads are the unavoidable costs of running your business, producing your products or supplying your services. If you have bricks and mortar premises, these overheads will include rental payments, utility bills and the cost of paying your staff. Drill down into the numbers and see where there are opportunities to reduce these overhead costs. That could mean moving to smaller premises, or reducing the size of your workforce, to reduce payroll expenditure.
  • Put limits on staff expenses – if your employees can claim expenses, or buy raw materials and equipment with the company’s money, these costs can soon start to rack up. It’s a good idea to put a spending limit in place, so each staff member can only spend up to an agreed amount. Having a clear expenses policy helps, as will training up your staff in good spend management techniques. Expenses cards or expense managment software will allow you to quickly set spend limits, track expenses and pull your expenses data through to your cloud accounting platform for processing.
  • Look for cheaper suppliers – if you can reduce your supplier costs, this will go a long way to bringing down your overall spend. If you’ve been with certain key suppliers for years, look around for new quotes, look at current market prices and see if you can negotiate better deals. And if your old suppliers aren’t flexible enough, try swapping to newer, more eager suppliers who will be willing to meet you in the middle on price.
  • Make your operations leaner – the bigger your operational costs are, the less margin you’ll make on your end products and services. One way to resolve this is to aim for a ‘lean approach’, paring back your staff, resources and operational complexity to the bare minimum. By making the business as lean as possible, whilst still delivering the same output, you keep your revenue stable, but reduce the spend level that’s eating into your cost of goods sold (COGS). The smaller your COGS, the more profit you make on each unit or sale – and that means better cashflow, more working capital and bigger profits.
  • Explore tax reliefs – you might assume that tax costs are an unavoidable expense when running your business, but it’s worth exploring which tax reliefs, grants or other business benefits you may benefit from. For example, research and development (R&D) tax credits that help cut your corporation tax expenses if you can demonstrate that you’re involved in innovation and groundbreaking R&D within your industry or specialism.

Talk to us about improving your spend management

If you’d like to get in control of your expenses, we’d love to chat. We’ll review your current costs and will highlight the key areas where expenses can be cut. Then we’ll help you formulate a proactive spend management program, to reduce your unnecessary spending.

The following content was originally published by BOMA. We have updated some of this article for our readers.

Turning a profit will be high on your list of goals as a business owner.

And if you want to generate the best margins, that means keeping an eye on the money that’s going out of the business, as well as what’s coming in.

So, how can your accountant help with this?

The days where your accountant just did the bookkeeping, compiled your accounts and filed your tax return are well and truly over. Modern accounting firms are far more interested in helping you with your financial performance, your business strategy and offering flexible value-add services that put you in better control of your finances.

If you partner with the right accountant, we can actually save you money – in both the short, medium and long-term. And that’s good news for the growth of your business.

Key ways your accountant can enhance your financial health

The less expenditure you have as a company, the bigger your profit margin. It sounds incredibly simple, doesn’t it? – The smaller your costs, the larger your profit. But if you’re not fully in control of your financial management, it’s very difficult to know WHERE you’re spending money, and WHY you’re not achieving your profit targets.

This is where working with a finance professional adds a huge amount of value. Your accountant helps put you back in the driving seat of your finances – and that’s never been more needed than in the current economic climate.

So, what specific things can your accountant do and what will the impact be on the future of your business?

1. Tax advice and planning – tax costs can be one of your biggest outgoings as a business, so we’ll focus on getting your tax planning under control, applying for all the relevant tax incentives and ensuring you minimize the taxes on your profits. By paying only what you’re legally required to pay – and making use of any reliefs – we can significantly cut your tax spend in the business.
2. Cashflow management and advice – ‘Cash is King’ may be a cliche, but it’s true. Unless you can balance the cash inflows and outflows from your business, you’ll never have the liquid cash to pay your bills, cover your payroll costs or cover your operational expenses. We’ll show you where money is going out, and coming in, so you achieve the ideal positive cashflow position.
3. Cost control and spend management – to improve your cashflow, you need to reduce your cash outflows. An important way to do this is to focus on cost control and spend management, reducing your expenditure, removing unnecessary costs and negotiating better deals with your suppliers. The more you cut costs back, the better your cashflow will be and the easier it will be to thrive, grow and become more profitable.
4. Forecasting and financial modelling – when we understand the key financial drivers in your business, we can build you a full financial model. This allows us to change the variables, run different scenarios and forecast the various future paths of your business. Being able to project these numbers forward gives you a clearer view of the path ahead – and that’s invaluable in the challenging economic times that we all face at present.
5. Better management reporting and information – your decision-making stands or falls on the information you have available to you. We provide detailed management accounts, breakdowns of key metrics and forecasts of your cashflow, spending, aged debt and revenue – all of which helps you to save money, make sound decisions and keep the revenues flowing into your business.

Talk to us about cutting costs and boosting profit

Rather than running your business on a wing and prayer, by working with an accountant you get a clear picture on your business financials. We’ll help you cut unnecessary costs, optimize the most profitable parts of the business and increase your overall return on investment.

Let’s talk about how we can work together to support your ongoing business profitability.

The following content was originally published by BOMA. We have updated some of this article for our readers.

Getting a good grasp of your cash flow can do wonders for your business, maximising profit and minimising loss of time, money, and sanity. It’s more simple to do than people think — especially if you have a solid business plan.

1. The common cash flow mistake

One of the most common mistakes trade business owners make when trying to improve their cash flow is only accounting for what’s on their profit and loss statement. When someone does this, they’re failing to realise that profit and cash are not the same things.

As the saying goes, “Revenue is vanity, profit is sanity, cash is reality”.

The profit and loss statement doesn’t tell you anything about cash — it’s simply an indication of the profit that comes as a result of the business’s sales and expenses. But there’s a lot more to cash flow than that.

Cash flow concerns:

• • Assets purchased
  • Money owed
  • Payment schedules
  • Work in progress
  • Director loans
  • Other considerations with real dollar costs.

So, if you’re running a trade business based on the profit and loss statement alone, then what you’re seeing on paper may not reflect what’s actually happening in regard to your business’ finances.

2. Understanding the balance sheet

Understanding the balance sheet can be a challenge, but you still need to understand it. If you can comprehend the balance sheet in tandem with your profit and loss statement, then you’re away — you’ll have no problem uncovering your cash flow. 

3. Your four-chapter cash flow story

To improve your cash flow and keep more profit in your trade business you need to look at your numbers like a story that’s told in 4 chapters. These 4 chapters represent each component of the formula we use to calculate cash:

Chapter One: Net Profit

Found at the bottom of your profit and loss statement, net profit is the profit your business makes after every cost has been factored in.

As we’ve outlined, this is often as far as people get with analyzing their finances, which shouldn’t be the case. To prove this point, let’s explore a real case that Trade Business Accountants had with a company that we’ll refer to as ABC plumbing. In the year before working with Trade Business Accountants, ABC Plumbing had grown revenue by 17%, operating profit by 19%, and net profit by 21%. Business appeared great. But, while ABC Plumbing did have a net profit of $208,302, they had also lost -$326,000 in cash.

Here’s how net profit fits into our four chapters:

Net profit sits in the left-hand column (meaning that it positively affects cash flow) because the more profit you make (assuming you collect it), the more cash you’ll generate in your business. 

Chapter Two: Working Capital Invested

Working capital is the amount of cash needed to run your business over the short term. This is where the balance sheet comes in.

On your balance sheet, there are only three lines that determine working capital:

• • Accounts receivable – the money owed to you by customers.
  • Works in progress (WIP) or stock – the work you’ve done at your expense that isn’t yet invoiced for or stock in the form of supplies on hand that are waiting to be allocated to a job and invoiced).
  • Accounts payable – the money owed to your suppliers.

These three things make up your working capital because they largely determine the amount of cash coming in and going out of your business in order for it to operate.

At this stage, you want to calculate the working capital invested this year on top of last year. This will show if the profit made this year was used to fund any increase in working capital from the year before. 

To find the working capital invested, calculate the difference in accounts receivable (e.g. the difference between 2020 and 2021), plus the difference in work in progress (WIP) and/or stock, minus the difference in accounts payable.

In the example above, accounts receivable has increased $191,781 ($863,014 – $671,233 = $191,781), WIP or stock has increased by $395,455, and accounts payable has increased by $152,926.

Meaning, all up, ABC Plumbing invested an extra $434,310 in working capital in 2021 compared to 2020.

This is where working capital invested sits in the four chapters:

It’s sitting in the right-hand column (which has a negative effect on cash flow) because the more working capital invested, the more cash your business needs to operate.

Chapter Three: Other Capital Invested

To make the balance sheet simple, we’ll refer to anything other than working capital, as just ‘other capital’. These are complicated accounting terms like accruals, prepayments, provisions, deferred tax, other current assets, liabilities, etc. that have little to do with the operational management of your business, so just leave that for your accountant and group them as ‘other capital’.

To calculate other capital, we’ll have to take another look at the balance sheet. The formula is the difference in equity (the value of the business if all assets were sold and all debts were paid off), plus the difference in debt (the value that is owed to creditors like banks), minus working capital invested.

In the example below, the combination of debt and equity represents the total increase in funding, or capital, in the business in 2021, used to fund the increasing cost of operations in 2021. So, by subtracting the working capital invested figure from this total, we can calculate the leftover, which is other capital invested in 2021.

Here, we can see that ABC’s equity has increased by $208,302, and the combination of short-term and long-term debt has increased by $326,007. That means, once we subtract the working capital amount of $434,310, we can see that they’ve invested an extra $100,000 in ‘other capital’ in 2021.

This is where other capital invested sits within our four chapters:

It also sits in the right-hand column which negatively affects cash flow. Like working capital, the more you invest in other capital, the more cash that gets drained from your bank account.

Chapter Four: Cash

This is the money left over after everything else has happened — arguably the most important factor of all. To calculate cash, we use the following formula:

In this example, as we said, despite everything looking great on the profit and loss statement and making $208,302 in Net Profit, ABC Plumbing actually lost $326,000 in cash. 

This is why you can’t improve your cash flow without looking past net profit and exploring all aspects of your business’ finances. If ABC were to continue only focusing on what their profit and loss statement was telling them, they would have remained fooled into thinking business was great and things could have gotten much, much worse.

So, now that you know how to understand your cash flow, let’s talk about improving it.

4. Improve cash flow & keep more profit

Flooding your business with more cash and keeping more profit comes down to two things: increasing profit & decreasing working capital. This is done through 7 key levers in your business: 

To increase profitability, we look at: 

• • Price
  • Volume
  • Cost of goods sold (COGS)
  • Overheads (found on the profit and loss statement)

To decrease working capital, we discuss: 

• • Accounts receivable days
  • WIP or stock days 
  • Accounts payable days (All found on the balance sheet).

If you want to make more cash in your business, these are the only seven things you need to know. To prove it, here’s another case study of a Trade Business Accountants client, let’s call them XYZ Electrical.

XYZ Electrical has been operating for many years now and they came to Trade Business Accountants wanting a better return on investment from their business, because, despite making $150,000 in Net Profit, XYZ Electrical only made $30,000 cash.

By adjusting their 7 levers by only 1% or 1 day, XYZ could’ve put an extra $59,495 cash in their bank account (a 300% increase in cash!). But, instead, XYZ Electrical increased their prices by 10%, which caused them to lose roughly 10% of their overall volume. 

A 10% decline in work would cause most trade business owners to panic, but when the price is 4.5 times more sensitive to cash than volume (every 1% increase in price equated to $19,000 in cash for XYZ, whereas every 1% increase in volume equated to $4,300), the decision to increase prices was a no brainer, even if it meant sacrificing some work. Investing $1 to get back $4.50 meant XYZ Electrical made $147,000 more in cash.

Outside of price and volume, the cost of goods sold (COGS) was reduced by 5% due to greater efficiency in delivery, better structure/planning, and better deals from suppliers. Overheads were reduced by 10% by removing unnecessary expenses that weren’t adding any value to the business. Receivable days, payable days, and WIP/stock days were reduced by 2 days, simply by invoicing and collecting money faster, while restructuring how they pay their suppliers. 

All up, these tweaks resulted in an extra $317,000 cash — just by focusing on the 7 key levers, XYZ Electrical increased their cash by 1157% from the prior year!

This is why, if you want to improve your cash flow and keep more profit, you need to understand your whole 4-chapter story and then only focus on the 7 key levers found on your profit and loss statement and balance sheet. Think, how many 1% or 1-day changes can you make in your business?

5. Get started on your own trade business

To get started and make things easier, Trade Business Accountants have created an Ultimate Cash Flow Boosters Checklist with 101 strategies that you can use to find the hidden cash flow leaks in your business across the 7 levers.

If you want to further your cash flow mastery, explore Trade Business Accountants’ cash flow masterclass. It includes step-by-step instructions, real client case studies, actionable strategies, and a whole bunch of exclusive free tools and resources. Use the code ‘TRADIFY100’ at checkout for free access to the cash flow training.

This is a guest article written by Trade Business Accountants, a specialist tax, accounting, and business advisory firm based in Australia.

This article is not intended to be financial advice. We recommend discussing any specifics with your accounting provider.

Good reviews are gold for your business. You can spend all day telling people how wonderful and great your product or service is, but what they really want is proof.

Showcasing testimonials and written or video case studies is a great way to do that because prospective customers are less inclined to believe what you, as a business, have to say. People are more interested in hearing and believing what other customers have to say, rather than what your sales staff have to say.

If this is an area of opportunity for you, start off with small steps

Ask your most loyal customers to send you a short statement on why they chose you, or what they like about your product or service.

Once you have a collection of these testimonials, use them as part of your marketing: on your website, back of your business cards, or even printed collateral.

Ask for them to add their review on your Facebook business page and on your Google Business profile. (Reviews show up next to your Google Business Profile in Maps and Search). Make the process easy by providing a direct link after a successful sale. (you can choose to have reviews on or off in the settings of your page – so you can decide if you are ready to implement this).

For bigger purchase decisions, case studies offer prospects a lot of detail on why you are the obvious choice. Choose customers or clients that you have a good relationship with. Ask a series of questions to highlight how the customer interacts with your business, the problem it solves for them, why they chose your business over the competition, and what they would say to others wanting a similar experience.

Your most loyal and satisfied customers can sell your business for you, through their story and their words.

The following content was originally published by BOMA. We have updated some of this article for our readers.

The beginning of a new calendar year is an excellent time to review the year just finished and reflect on what worked, what didn’t, what you’d like to change and new things you’d like to implement.

Take the time to review the year and acknowledge all that has happened, good, bad or indifferent. Examining the year with an objective perspective can provide valuable insights to prepare for the next business year. Planning and goal setting will help provide a focus for your business efforts.

Your Yearly Business Review

• • What were the most significant impacts on your business in the last 12 months? How well did you meet the challenges?
  • What worked well last year? What systems, technology, products or services were successful?
  • What accomplishments can you celebrate?
  • What situation, event or experience provided the biggest learning opportunity?
  • What is the biggest challenge or frustration you face as you prepare for the year ahead?
  • What did you most enjoy during the year? Do more of it. What did you least enjoy? Do less of it!
  • Analyse your financial reports. Are you earning what you’d like to? Is the business sustainably profitable?

Get Ready for a Great Year

While there are many metrics you could evaluate to track business performance, we’ve given you just a few ideas to inspire your business planning for a positive start to the year.

If you’d like to chat about what you can do differently this year to enable your business to thrive, book a time with us today.

The following content was originally published by BOMA. We have updated some of this article for our readers.