In our recent article, we asked if you are stressed by cash flow and proposed a methodical approach to correcting cash flow issues in your business.
We also promised to take a deeper dive into some of the areas you can address to start to close the cash gap in your business. Now, we take a look at the P&L issues related to cash and what you can do about them.
The impact we are looking for here is to retain the cash we’ve got for longer by putting off non-essential spending until later. The sorts of things you might defer are the nice-to-haves. The things that don’t derail the organisation if you don’t have them straight away. Maybe holding over that all-staff conference until next year, or sending the team on an advanced Excel training course a few months later than you originally intended. You do expect to derive a benefit from those spends, but if it doesn’t happen now, the worst that happens is it delays the realisation of the advantages you were seeking.
Rather than a timing issue, what we’re looking to achieve here is an all-time saving. A dollar saved is a dollar that drops through to the bottom line.
So, we’re looking for the ‘fat’ that we can trim from our spending. We need to be really careful here to consider the long-term as well as the short-term. We have written before about the impact of cuts to things like marketing and training. Things that you might view as non-essential but they might have a long-term effect.
What we would recommend is a good, hard look at the P&L. You are looking for answers to these questions:
- What are your biggest categories of spending? There might be savings here. When was the last time you took your energy needs to tender, for example? Which inputs could you buy better?
- What drives your biggest categories of spending? For example, in our business it’s people. Wages, super, workers’ compensation insurance and payroll tax are all employment costs. But they also drive our need for space (rent), car parking, recruitment, training and software subscriptions. So, a labour saving leads to widespread savings. Do you have too many people?
- What is the trend of spending in your business? If it is going up, what is causing that? Are you getting a return from each dollar of spending?
- Does your spending make sense? If your business has changed over time (and they all have) are there residual spends that have continued unnoticed? For example, it’s amazing how many people are still paying for software that they don’t use.
- What costs are being driven by the choices you make about your operating or service models? For example, a lot of people have realised they can work remotely, if not all the time, at least some of the time. So, a decentralised workforce could lead to needing less space and ultimately, paying less rent. It’s also led a lot more people to considering outsourcing low-value tasks to low-cost labour centres.
The point here is to recognise the choices that you make. If you are conscious of them, you can make different choices.
Bring forward revenue
Geez, we would all love to do that, right?! Obviously, this is all about a value proposition. It has to make sense for you and your customers, or it just won’t happen.
Can you make the sale earlier than you otherwise would? Is there some urgency about it? Has the market changed? For example, your customers might be prepared to hold a greater volume of inventory given the realisation that it’s not always easy to get the inputs they need, when they need them. So, best to get them while you can! COVID connected a lot of people with that reality.
But it could also be as simple as changing your payment terms. Is it OK in your industry to ask for a deposit? Or would your customers prefer to pay by the month, rather than getting one big bill every so often?
Look, people are sensitive about cash. And heaps of business owners won’t even contemplate this because they are so worried about the customers’ reaction. But payment terms are only one part of the value equation.
All we are saying is don’t accept the status quo without having questioned it. What could you do to differentiate your offering so much so that the customer is prepared to accept non-standard payment terms? In other words, how can you create exceptional value? Now, that’s a good exercise to go through whether you bring forward revenue or not.
This is the ‘holy grail’. There are really only a handful of ways to make this happen.
Increase the average spend per transaction. Can you increase prices? Most people automatically say no. The reality is usually very different. Why? Because once again, price is only one part of the value equation. How many customers would you need to lose before the price increase actually leads to a drop-off in total revenue? And what can you do to strengthen the other parts of the value equation, to reduce the risk you will lose customers anyway?
Can you sell a plus-one? McDonald’s made this famous – who hasn’t been asked would you like fries with that?”
Increase the frequency of transactions. Ever been handed a loyalty card at the local coffee shop? That’s because they want you to buy more coffees from them. They know that people are sometimes tempted to walk into the shop with the shortest queue. But they want to become your preferred supplier. How can you apply this sort of principle to what you do?
Increase the number of customers. How can you win more customers? A deep dive into this topic is beyond the scope of this article but understanding what you bring to the market, how that creates value and who might benefit is a good way to start targeting new customers. If you’re struggling with that, maybe focus on your Top 10 customers and ask yourself, who else is just like them?
The next article in this series is about the cash cycle and how you can get cash flowing more freely in your business.
If you need to discuss effective cash management or you would like to better understand the trinity that is your P&L, balance sheet and cash flow, then reach out to the BridgePoint Group team and see how we can help you.
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