For all businesses, preventing losses is critical. While failing to turn a profit means that a business’s expenses exceed their income or amount of money coming in, this doesn’t necessarily mean that your business is unsalvageable.
In fact, with some simple changes, you can actually ensure your business model works as it’s meant to.
To help you prevent and reduce losses for your small or medium sized enterprise, we’ve put together this helpful list of tips and strategies.
Start Forecasting Your Cash Flow
The more knowledge you have about your business’s financial situation, the more power you have to change it for the better. Creating a cash flow forecast allows you to begin predicting upcoming expenses and earnings so you can better manage the amount and availability of working capital for ongoing operation and investment.
In the simplest of terms, a cash flow forecast indicates the amount of money flowing in and out of your business.
Cash flow forecasts allow you to identify future gaps in incoming cash before they happen so that you can take relevant action to address any capital shortfall before it actually affects your business.
Find out how to put together a cash flow forecast or download our template by heading to the ScotPac Australia webpage here. The same principles apply for a business based here in New Zealand.
Cut Costs Where Possible
You may assume that a business experiencing losses would realise that costs should be cut where possible, but not all businesses actually do it.
Start with reviewing your business expenses and determining which ones are necessary and which ones are not. The more costs you can reduce the more balanced your costs/revenue will be.
If the standard of your service, the quality of your product and the seamlessness of your operations won’t be affected by the cost cutting measures, it will positively help your ability to generate revenue.
Focus On Increasing Liquidity
Increasing liquidity, wherever possible, can really help a business when cash flow is tight. You can do this by offering your customers early payment discounts to encourage them to settle invoices before the net payment term you ordinarily provide.
Alternatively, you might want to consider Invoice Finance. This financial solution allows you to unlock the capital tied up in accounts receivables, or outstanding invoices. Instead of having to wait the length of your payment terms (or longer!) you can submit your unpaid invoices to us and receive a cash advance of up to 95% of the value of the invoice or invoices. The remaining 5% balance, less fees, is provided once the customers settle their accounts.
Increasing liquidity means that your cash flow will be smoother, more consistent and more reliable which makes running a successful business that much easier.
Revise Your Business’s Financial Plan
Most businesses have a financial plan that outlines expected strategies for covering expenses and generating profits. However, circumstances change and your financial plan should reflect that.
If it is out of date or no longer fit for your situation it may be time to revisit the plan and see what has changed and what can be improved. For example, costs associated with one aspect of the business may have increased but your pricing hasn’t changed in line with the change in outgoings.
Pro tip: Begin by comparing your current performance with your financial plan and expectations and then outline appropriate action to get back on track.
Increase Volume of Sales
While reducing losses is obviously important, you should also be focusing on increasing revenue and generating profits by increasing sales. In fact, for the average business, a 1% increase in sales can result in a 3.3% increase in operating profit!
How can you effectively increase sales? Consider up-selling or cross-selling opportunities. Think about offering bulk buying discounts or package deals to shift more inventory quickly. Or you can research the different marketing and advertising strategies out there to expand market reach.
Remember to encourage existing customers to refer your business on to their network as well. This simple strategy is highly effective in generating quick returns.
Consider Increasing Prices
Inflation occurs every year, so if your prices aren’t being increased annually as well you’re effectively reducing your pricing instead. An appropriate increase in pricing can generate more revenue and keep up with increased expenses.
McKinsey & Company’s study of the S&P 1500, for example, has shown that increasing prices by as little as 1% can result in an increase in profits of up to 8%!
Of course, make sure to take into account your business’s circumstances and industry. Too high of an increase or an increase in pricing across the board without due consideration can have an adverse effect on sales.
Negotiate With Your Suppliers/Vendors
Many business expenses from vendors and suppliers are unavoidable but by revisiting your contract and deal you can negotiate better rates and a more affordable alternative. While staying loyal to a vendor has its merits, you need to keep an eye on the market for better deals to help you improve your bottom line.
You can also consider utilising a Trade Finance facility courtesy of the ScotPac team. This line of credit allows you to pay both domestic and international suppliers. The extra boost of purchasing power gives you negotiation leverage to increase your margins and release the capital tied up in the supply chain.
Explore Options for Outsourcing
Outsourcing comes with its advantages and disadvantages but can be an effective way to reduce losses.
There are many business tasks, depending on the industry, that can be outsourced to save you more than just money, but time as well. From account management and collections to data entry, if outsourcing the work provides your business with greater profit and more access to working capital for ongoing operation it is worth considering.
Finance Business Growth/Expansion
Financial solutions can be of significant assistance for a growing business with cash flow problems. As operations scale, new assets, staff, and materials need to be financed. The required upfront investment without access to credit can affect profitability for the worse and increase losses.
That’s why businesses looking to both grow and minimise losses turn to Trade Finance to help avoid the cash flow growing pains associated with business expansion.
Organise Your Operations
Streamlining your business’s operations into more efficient processes and optimised workflows can reduce the amount of wasted time, labour and resources. This will all help to reduce the ultimate goal of reducing losses.
The more automated your customer payment reminders are, the less chasing up your accounts receivable will have to do. The more robust your booking software system is, the more appointments you’ll be able to schedule automatically.
Even revisiting the guidelines and contracts for onboarding subcontractors and/or employees can help you ensure higher efficiency and lower waste. Remember: If time is money, then improving productivity will help your business save cash.
Start Minimising Your Losses with ScotPac’s Business Finance Solutions
While it may not be unheard of for new and growing businesses to operate at a loss for the first year of their operations, ultimately to ensure success all businesses need to turn a profit.
As we have mentioned, there are a number of ways to help your enterprise increase profit by reducing financial loss.
Our business finance advisors understand the needs faced by SMEs and can help you ensure access to the funding you need to fuel sustainable, long-term growth.