Some of the world’s richest people have penny-pinching habits.
Warren Buffet is one of them. He lives in the same house he bought in 1958, which only cost him $31,500 (about R416,000). The same applies to some of the most successful companies. Many have frugal habits, placing almost the same amount of focus on reducing their costs as they do on driving revenue growth.
Master Tax Practitioner and the director of accounting and tax firm Innovative Accounting Solutions, Renier Nell, says there are several key areas that finance divisions need to concentrate on when trying to find ways to reduce costs and ensure smooth-running operations.
“Many of these are time-consuming and require enormous attention to detail, which means they are often put on the back-burner. This is not wise, as neglecting these areas could have far-reaching negative consequences for the business.”
Nell recommends that business owners or managers adopt five simple rules to keep their business cash-flush:
1. Compile a business plan
A carefully considered business plan can become an indispensable business management tool. If a business plan was not compiled when a company was established, it is worth considering compiling one after the fact. They are excellent for checking if the correct procedures and processes are being followed and whether the business is meeting its goals, sales targets and other important milestones.
By consulting the business plan, management teams can calculate whether their service or product is performing according to annual forecasts. If they are not living up to projections, a ‘more, better, different’ approach may need to be adopted. This suggests that if something is not working, do more. If doing more does not work, do it better. If doing it better doesn’t get the results, then do it differently. This continuously looped process is aimed at interrogating all aspects of the business and achieving the best possible outcome by doing it innovatively.
2. Control your costing
One of the best ways to save your business money is to reduce business expenses. Conducting a budgeting process allows businesses to compare business expectations with actual results. When costs are higher than expected, it’s time to do something about it.
One important cost saving strategy is to shop around. This involves getting quotes from different suppliers before entering into agreements with any of them. Also renegotiate contracts annually. While it is a lot of work, renewal discussions often result in a reduction of costs.
3. Be on top of profits
Too often, accounts are not properly managed. When companies don’t have a costing structure in place, they underquote clients or invoice the incorrect amount, they and themselves short-changed and profit margins sadly diminished.
It is important to play a hands-on role in the business and keep track of costs and profits. Being on top of the management accounting data – balance sheet, cash flow, and income statement – is critical. Businesses need to know how to interpret the data to establish whether they are making the correct profit or not.
4. Budget and forecast more regularly
Not so long ago, 12-month budgeting and forecasting was the norm. Today, if businesses want to keep abreast of a fluctuating business environment, they need to revisit their budgets and forecasts more regularly. While six months may suffice for most business, there are some industries where change happens so fast that forecasts should ideally be conducted every three months.
A financial forecast is an estimate of a business’s projected income and expenses. Without a forecast, it would be difficult to draw up a business plan or establish goals for the business. A budget that merely sets spending limits can be detrimental, especially to small businesses. This is because it doesn’t allow them to react to market conditions. A flexible budget is preferable as it helps businesses adjust their spending, boost marketing efforts to drive sales, and investigate unanticipated decreases in revenue.
5. Focus on your core business
Business heads should have an intimate understanding of all aspects of their companies. A lack of knowledge in one area of the business may result in it becoming the Achilles heel of the business.
That said, where knowledge in one area of the business is limited, it might be worth considering outsourcing the work to experts. This allows the operation to focus on its core business. Improved efficiencies of the outsourced function can also lead to time saving, a reduction in costs and the optimisation of resources.