If running a business were easy, or even uniformly profitable, everyone would be doing it. In principal, business is simple. You buy from your supplier for a little and you sell to the consumer for a lot. But this gross oversimplification doesn’t align with the realities of running a SME in the 21st century. There are many economical, social and technological reasons why the deck is stacked against small business owners. Special corporate tax rates, the inherent advantages of bulk buying in huge numbers and prohibitively high start up costs for new businesses make standing shoulder to shoulder with the corporate giants harder than ever.
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Walk the Line
The finest line an entrepreneur will walk, particularly when starting out, is the line between the need to mitigate spending and needing to invest sufficiently in the areas that are likely to contribute to growth and prosperity. Any entrepreneur worth their salt will know that spending is not inherently bad but it’s a case of knowing which areas of spending have the highest fiscal multipliers. A fiscal multiplier is essentially the amount of return that an investment can be expected to generate. Marketing costs, for example, are among the best fiscal multipliers in business, since growing your brand and creating familiarity or even ubiquity among consumers when it comes to marrying your brand to your product are fairly conducive to making money. Indeed, marketing costs can yield an average return:investment ratio of 5:1, so it’s fairly safe to say that’s one of the places where the smart money goes.
As hard as entrepreneurs may try to invest judiciously and cut costs appropriately, many SMEs still find themselves engaging in wasteful spending behaviours that may not be cataclysmic in isolation but can do serious damage to your cashflow over time.
And let’s not forget… Cash is king!
Liquidity is of paramount importance to a small business. Liquidity allows businesses to move with the times and adapt to the landscape of their chosen industry or the greater economy. It’s liquidity that allows businesses to grow, diversify and evolve. If a business is able to invest in a piece of equipment it can improve its productivity and output while reducing costs in terms of human resources. Indeed, his piece of equipment could revolutionise the business… But if the business has poor liquidity, then that opportunity is just going to fall by the wayside and the business is at risk of stagnating.
There are numerous ways in which a business can improve its cash flow. One of them is bundling (not to be confused with bungling). This is a common practice in retail but could be applied to virtually any business with a little creative flair. It can undo wasteful spending on stock (more on that later) that has compromised your liquidity). Essentially, the consumer is offered the choice of Item A on its own or, at a small additional cost, Item A plus Item B. The aggregate cost is less than if Items A and B were purchased separately so value is built in for the consumer but the business still turns a profit and claws back a little liquidity.
If you’re serious about loosening your cash flow, however, you need to audit your business for wasteful spending. Here are some common areas…
Too much outsourcing
There will inevitably be some areas, such as marketing, which you may wish to outsource. Outsourcing isn’t bad in and of itself, but as a business owner you need to be sure that there is value in your spending. If you’re outsourcing a task that your employees could do just as well if you made a small investment in resources and allocated the time, you might make significant savings by tackling the task “in-house”. Areas such as personnel development, for example, are good to carry out in house if you have capable human resource staff who are up to the task. Not only will you be more likely to ensure that employees are developed “your way” rather than through the lens of a one-size-fits all business paradigm, you’ll be able to track your spending on said development and know exactly where every penny is going far more effectively than if you were to outsource.
Investment in tech sounds like a great idea, sure. All businesses want to consider themselves at the cutting edge of industry technologies whether the business has a technological bent or not. That said, as much fun as it is to shop for shiny new tech toys for your business can be, it’s not always necessary or even appropriate. If you’re upgrading your tech because you have evidence to suggest that it will facilitate productivity that’s one thing but if you’re doing it just for appearance’s sake this might be wasteful vanity spending.
Not shopping around suppliers
All businesses benefit from having a good relationship with their suppliers. There’s nothing more healthy than businesses working together for mutual advantage. There comes a time, however, when some relationships go bad and suppliers don’t value your custom as much as they should. Many entrepreneurs are far too busy with the day to day operations of their business to spend time searching for new suppliers but getting complacent could be to your business’ detriment. If your supplier is charging more for your printer cartridges than 123inkjets or if your bathroom supplies guy is getting undercut by Costco, then it may be time to shop around. In your business life, as in your home life, don’t stay in a bad relationship with a sub par supplier for the sake of convenience.
Now, we’ve argued for spending in the pursuit of business growth, but it’s important that this spending is done as and when needed. Many entrepreneurs think it savvy to spend for growth before that growth has had the chance to occur naturally and organically. While capitalising on a bargain priced bulk load of stock, a new piece of equipment or a bigger premises can certainly contribute significantly to business growth, it can just as easily torpedo your chances of growth if your business isn’t ready for the investment.
By keeping an eye on wasteful spending and investing prudently in areas proven to have high fiscal multipliers you can ensure the ongoing growth and prosperity of your business.