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 to develop new products or improve existing ones without taking a loan.
Cash solvency will provide a solid financial backbone that will allow to give returns to shareholders in the form of dividends and share repurchase. This will build shareholders’ confidence, which will bring significant breathing room to operate.
Cash also allows 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, diminishing its ability to pay creditors. If a business shows signs of a cash problem, the borrowing capacity will dry up fast as lenders will doubt the ability to repay debts. This may cause cost of capital to rise and push the business to the verge of bankruptcy.
In addition, cash flow shortage can be a growing concern for the business when operating in a volatile market or during times of economic uncertainty.
Cash-saving strategies for SMEs
With SMEs being especially vulnerable to economic volatility and the effects of cash shortage, it’s important to adopt cash-saving strategies to maintain cash solvency.
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 and 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 important 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, instead of taking out a traditional bank loan and accumulating interest over the span of several months.
2. Spending should be focussed 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 need to be paid on return on investment (ROI) and 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, such as the number of leads generated by a campaign or the number of leads converted into customers. If profit from increased sales does not exceed promotional cost, marketing expenses need to be reduced or outsourcing should replace a full in-house team.
The temptation to spend on bigger office spaces, expensive software, and nice furniture, should be avoided. These expenses do not bring direct profit. As a growing company, money can be put to better use, such as training staff to specialise in IT to 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, for project management and meetings. This will save the cost of paper filing and paper storage units, not to mention savings on the purchases of paper, staples, binders, and ink for printing.
One should even promote a work culture of saving energy by 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 to avoid spending on expensive in-house software to run operations. One can even subscribe to open-source software to operate accounting, invoicing, documentation, and project management processes, just to name a few.
4. Interns should be leveraged
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 specialization and a one-off payment can be made for a short period in exchange for their service.
As interns will serve the company on a temporary basis, there will be savings on yearly bonuses, contributions such as the Mandatory Pension Fund, and insurance, which 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 type of 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 in fact 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, fresh graduates can provide ideas that resonate with the younger generation. If they studied coding and programming, they will have learned the latest languages, programmes, and tools, which can help develop new apps to sell products better and faster.
7. Negotiating recurring expenses
When rolling operations year after year, 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, and subscriptions to such services should be discontinued.
Next, the recurring expenses should be renegotiated at a lower price from suppliers. They are likely to reduce their rate for since one is considered their long-term client. 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.