Any business operation follows a cyclical pattern for its ventures. Services and products will progress from their initial stages to growth, on to maturity, and finally, decline. I entails the need to continually evolve and invest in research and development to update existing products and come up with new ideas.
All of the above cost money. More often than one can think, investment projects can be grabbed at a bargain price if there is cash on hand at the right time. With cash, one can gain the upper hand in negotiating investment prices as they can be paid for immediately. Cash reserves will also allow the company to develop new products or improve existing ones without taking a loan.
Cash solvency will provide a solid financial backbone and giving returns to shareholders. The returns are in the form of dividends and share repurchase. The process will build shareholders’ confidence, which will bring significant breathing room to operate.
Cash also allows the business to cope with unexpected expenses, such as unforeseen legal costs and losses due to natural disasters.
What happens when there are no cash savings?
A lack of cash can threaten a business’ liquidity status. Thus, diminishing its ability to pay creditors. If a company shows signs of a cash problem, the borrowing capacity will dry up fast. So, lenders will doubt the ability to repay debts. It may cause the cost of capital to rise and push the business to the verge of bankruptcy.
When operating in a volatile market, cash flow shortage can be a growing concern. Likewise, the concept also applies during times of economic uncertainty. At this stage, businesses are exposed to a drop in consumer’s confidence.
Cash-saving strategies for SMEs
It is crucial to adopt cash-saving strategies to maintain cash solvency. This approach is particularly true during economic volatility as it affects cash reserves of SMEs mostly.
1. Identify leaks and raise cash
The first rule of cash saving is to cap cash spending. Run an expense audit of all business operations. Identify the expense areas that are bleeding money. Action should then be taken to address the results of the audit and non-necessary expenses will need to be cut fast.
When in need of external funding, it is crucial to choose the option that best suits the business goals, needs, and financial situation. Alternative forms of financing should be considered, such as invoice factoring. While taking out a traditional bank loan accrues interest over the span of several months.
2. Focus the spending on areas that generate profit
Business operations need to be evaluated and the money trail should be followed. Each penny spent must have a return value. When it comes to expenses, attention needs to be paid on return on investment (ROI). Expenses that do not provide a return should be cut. Large amounts of money can be saved by trimming down such small expenses over the long run.
For example, if there is a marketing team, specific metrics should be used to gauge their ROI. For example, the number of leads generated by a campaign or the number of leads converted into customers. If profit from increased sales does not exceed the promotional cost, marketing expenses need to be reduced. Outsourcing should replace a full in-house team.
The temptation to spend on bigger office spaces, expensive software and beautiful furniture should be avoided. These expenses do not bring direct profit. As a growing company, money can be put to better use. Training staff to specialise in IT can improve work performance.
3. Go green
Going eco-friendly and adapting to new technologies can help save cash. For example, printing of reports can be reduced by using free online resources, such as Google Drive, Slack, and Trello. Some also offer project management and meetings solutions. By doing so, the company will save the cost of paper filing and paper storage units. Also, it will save on the purchases of paper, staples, binders, and ink for printing.
One should even promote a work culture of saving energy. Putting equipment on a power strip and turning off the lights when going out to save on electricity bills.
Additionally, one can opt for a cloud-based system rather than local computer networks. It will help to avoid spending on expensive in-house software to run operations. One can even subscribe to open-source software to operate accounting, invoicing and project management.
4. Leverage on interns
Another way to save cash is to leverage interns. Instead of hiring all full-time staff, one could recruit interns. Several interns can be hired for the salary of one experienced, full-time employee. Quality work can be done as interns can be hired based on their specialisation. A one-off payment can be made for a short period in exchange for their service.
Interns will serve the company on a temporary basis. Hence, the company will save on yearly bonuses and contributions, such as the Mandatory Pension Fund. Also, insurance would otherwise have to be provided when hiring a full-time employee.
5. Charging purchases to a cash-back credit card
Purchasing is a daily component of any business, so might as well capitalise on it as part of a cash-saving strategy. Instead of using cash or any credit card to pay for purchases, one can acquire a good business credit card with a maximum cash-back option.
Using a credit card will make it easier to see where the money is going, and one can enjoy the cashback on top of the standard cost to help cash saving.
6. Hiring smart, inexperienced people
When including a requirement for years of experience in job ads, zeros are added to salary expenses. An experienced person may not always provide the best value for money.
Fresh graduates will come at a discount price and may work hard to outperform others and prove their worth. They will bring in new ideas and insight on the latest technology and can be moulded to the company culture, all at a much cheaper rate. For example, if one needs creative hands in running marketing campaigns, consider fresh graduates. They can provide ideas that resonate with the younger generation. If they studied coding and programming, they would have learned the latest languages, programmes and tools. They will be able to help develop new apps to sell products better and faster.
7. Negotiating recurring expenses
When rolling operations year after year, a business will incur recurring expenses. These should be listed down in order per month, per year and per five years. One should identify recurring expenses for services that are barely used. Make sure to unsubscribe from unused subscriptions to such services.
Next, negotiate the recurring expenses at a lower price from suppliers. If you are their long-terms client, they are likely to reduce their rate. This newly bargained rate will give cash flow a generous lift.
Building a habit of saving cash
Even though a business is small or medium-sized, one can save cash by managing operations efficiently. While the strategies listed here sound like common sense, too often, businesses fail to apply them regularly and build a good habit of saving cash.
One should not feel disheartened if large increase in cash reserves are not seen right away. By gradually but regularly saving cash, the business is on the path to become more financially sound.