Small businesses are at an inherent disadvantage when it comes to capital. Most are not publicly traded, which limits their ability to sell stock to raise capital. Moreover, the owners of a closely held company risk losing control when they take on shareholders who, under the law, have a say in how the company is run.
As a result, finding ways to save money can be critical to a small business’s survival. In other words, a small business that wastes money cannot assume that an investor (or even a creditor) will infuse money at the right time to save the business.
Here are ten ways small businesses unknowingly waste money and how they can change their wasteful practices:
Develop a Budget
Because capital is difficult to come by, most small businesses meet their operating expenses through a combination of credit and revenue. Over the course of a year, a small business may be profitable. However, most businesses are seasonal, which means that during some months, they have little or no revenue and in other months, they are flush with revenue. Many costs, however, are not seasonal.
For example, a retail shop needs to pay its lease and keep the electricity on during the summer, even though its sales may come primarily during the winter holiday season. Conversely, a water park must pay lifeguards and maintenance workers during cooler months even though its busiest time is during the warmer months.
Managing cash flow means making sure that your business has enough cash on hand to cover its operating expenses at all times. When business is slow, this might mean tapping credit lines and cutting expenses. When business picks up, this means investing the revenue in inventory and employees so you can maximize revenue.
Developing a budget will help you control costs regardless of revenue levels. This will also allow you to identify waste or, at least, wasteful practices. For example, if your revenue drops by 30% during the summer, a budget will help you identify where you can cut costs to make sure your cash flow is maintained. More importantly, a budget will help you to stick to your projections for revenues and expenses so you can weather slow times.
Take Advantage of Opportunities
One reason for managing cash flow is to take advantage of opportunities that arise. Many businesses, for example, use slow months to repair equipment, develop new products, or even make capital improvements when downtime will not affect customers. A helicopter tour company whose business slows during the winter may find that helicopter parts are inexpensive when demand is down. This company may stock up on parts that it commonly needs and even conduct preventative repairs and maintenance when revenue-generating tours will not be impacted.
Likewise, trade shows and conventions take place during the off-season for many businesses. Using spare cash to attend industry events can help you develop relationships with vendors and suppliers, learn about trends in your industry, and find opportunities to partner with competitors.
However, none of this is possible if your business mismanages its cash flow. Rather, this is made possible by using debt judiciously, staying current with bills, and maximizing revenues.
Practice Inventory Control
Whether your small business provides goods or services, inventory is a mixed bag. On the one hand, inventory allows your business to remain prepared to provide your goods or services quickly to customers. Fast service usually translates into happy customers who, hopefully, will develop loyalty to your business.
On the other hand, idle inventory is wasted money that could be used elsewhere. For example, you might regret buying ten copier cartridges when the printer breaks down and you have no money left to fix it.
This does not mean that you should skimp on inventory or supplies. Rather, it means you should practice inventory control so that your business has what it needs when it needs it, without wasting money on unused inventory. Inventory control not only saves money and improves cash flow, but it can also help your business use its employees more efficiently in tracking, ordering, and stocking inventory. Moreover, inventory control can help you to eliminate sources of waste and even pilfering by employees. Finally, inventory control can help your business identify unprofitable products or services through their low turnover.
Inventory control includes:
- Forecasting: Forecast your sales and your inventory consumption. For example, a fast food counter may consistently sell an average of 75 drinks per day. This translates into a consumption of 75 drink cups per day from the business’s inventory.
- Audit and re-audit inventory: Count up what you have on hand to get a baseline and periodically re-audit to account for waste and defective inventory.
- Inventory tracking: Measure actual sales so you know what to deduct from your inventory count. For example, simple arithmetic would tell you that if you had 1,000 cups on hand and sold 500 drinks, you should have, at most, 500 drink cups on hand.
- Set your reorder level: Setting a reorder level will depend on the lead time and consumption rate. For example, if your cup supplier takes three days to fill an order, you will need to reorder when you still have at least three days of cups on hand.
Shop for Credit
Another component of cash flow management is the judicious use of credit. Many businesses use credit for large purchases or to smooth out cash flow when revenues fall. However, overpaying for credit can be wasteful and, at its worst, can ruin a business if it cannot find debt relief.
For example, many small businesses are tempted to use credit cards as their primary source of debt financing. Credit cards are easy to obtain because they require little documentation and have a high approval rate. However, small businesses will pay for that ease. Business credit cards currently have interest rates between 14% and 22%, with the average around 18.5%.
Small business loans and revolving lines of credit often have lower interest rates and, thus, cost less. For example, a small business loan interest rate is currently between 7% and 9% while business lines of credit can have an interest rate as low as 6.5%. The trade-off, however, is that lenders require more documentation and a solid credit history to approve business loans and lines of credit.
For an established business that needs to tap credit to make payroll or acquire materials and equipment during slow times in its business cycle, loans and lines of credit can be an essential source of short term funds. However, these options do not work for every business.
To make sure that your business finds the best deal for credit, talk with several lenders to determine all your available options before committing. The U.S. has over 30 million small businesses and lenders will compete to provide your business with credit if you shop around.
Analyze Equipment Acquisitions
Likewise, shop around for finance options when acquiring equipment. Equipment manufacturers and distributors often steer businesses into leases. This is not because they want to save your business money. It is because they want to make money off your business.
This is not to say that every equipment lease is a bad deal. Depending on your situation, an equipment lease may be a better option than purchasing outright or an installment loan. However, after a salesman provides you with all the selling points of a lease, you should run an analysis to compare the lease to the cost of purchasing the equipment.
The benefit of a lease is that the lessor is usually responsible for maintaining and repairing the equipment. This can save a business both the risk of downtime and the cost of repairs. Moreover, leases are usually deductible as expenses from a business’s taxes when incurred rather than being spread over the equipment’s lifetime.
The benefit of a purchase is that your business owns the equipment outright and can resell the equipment when new equipment is purchased. Moreover, equipment can be depreciated on the business’s taxes over its useful lifetime.
One option that can be analyzed is a purchase with a service contract. In some ways, this option provides the best of both worlds. The equipment belongs to the business, but the cost of service and maintenance (and even some repairs) are fixed. This provides the predictability that helps small businesses manage cash flow.
For example, an auto shop has a choice of leasing or purchasing an air compressor system. Leasing may be an attractive option because it includes maintenance. However, when compared to an outright purchase plus a service contract, the auto shop might find that the lease is more expensive (since both would likely exclude air compressor parts) and, at the end of the lease, the auto shop must return and replace the air compressor system.
Understand Your Property Lease
Many small business owners do not understand their property lease. As a result, they may spend money either out of ignorance or because they are deliberately misled by unscrupulous landlords.
For example, a broken faucet or toilet is inconvenient and unsafe for customers and employees. Under the circumstances, a small business owner might be tempted to call an emergency plumber and pay for the repairs herself. However, some leases place the responsibility for maintaining and repairing fixtures, like plumbing, squarely on the landlord’s shoulders.
The reason for this is fairly reasonable and logical. If the tenant is responsible, the tenant might forego the repairs because the tenant simply does not care about damage to property the tenant does not own. Rather, the tenant may just be required to report damage to the landlord so the landlord can mitigate damage to the property and inconvenience to other tenants.
In short, contact your landlord about any routine maintenance or repairs that are necessitated by ordinary and expected use of your space. You might be able to avoid paying for these repairs under the terms of your lease.
Commercial insurance policies usually provide coverage for two forms of claims.
- Property damage: If your business property, such as office equipment, is damaged by a natural disaster or stolen, business insurance policies often pay to replace or repair it.
- Business liability: If someone is injured in your space, business insurance policies provide lawyers and cover damages up to the policy limit amount. For example, if a customer slips and falls in your office or store, the insurance company will often take the lead in defending your business against the claim and attempting to settle the claim.
While foregoing insurance might save your business some money in insurance premiums, this strategy can be penny-wise, but pound-foolish. Business policies are usually relatively inexpensive, and almost certainly less expensive than being sued for personal injury or replacing all your furniture and computer equipment after a disaster.
Look for Incentive Programs
City, county, state, and federal programs offer incentives in the form of direct payments, low-interest loans, tax credits, and tax deductions that many businesses miss. These programs might provide your business with huge tax breaks and even money in your bank account for practices your business already uses. For example, depending on your city and state, your business may be entitled to incentives for hiring veterans and ex-cons, locating your business in particular neighborhoods, or using alternative sources of energy.
Governments are not the only sources of incentives. Banks and lenders offer cashback or interest rate reductions to customers with good payment records. Businesses, like office supply stores and gas stations, offer rewards programs for loyal customers. A discount coupon or cashback on purchases your business already makes can be an easy way to save money.
Know When to Hire Experts
Small business owners become experts at everything so they do not need to outsource. However, there are times when outsourcing can save money and trying to handle every issue in-house can be wasteful.
For example, spending 40 hours preparing your business’s tax returns may feel like you saved money, but that time represents an entire week that you were not running your business. If a tax accountant could have done the same work in four hours, you might have made more than enough money during that one week running your business to pay for the accountant several times over.
Worse yet, if you make a mistake, you may still need to hire the tax accountant to fix the problems your frugality caused. When dealing with accounting and legal issues, the cost of a mistake may more than justify hiring an expert in the first instance.
Comply with the Law
Most small businesses are not good at planning more than a few months ahead. This is not due to negligence or irresponsible behavior. Rather, most small business owners are so preoccupied with running their businesses that they cannot do everything their business needs until it becomes urgent.
Legal compliance, however, can be very unforgiving. Failing to comply with labor laws, tax laws, insurance laws, and business licensing regulations can be a costly mistake. Even if a business cannot justify hiring a full-time lawyer for compliance, an hour consultation with a lawyer can help a business set up a calendar so it does not miss important deadlines.
Small savings can add up for small businesses. Eliminating waste, managing cash flow, and finding unrealized sources of revenue can help a business stay on the road to profitability.