We often say that it’s the little things that count in life, but the same is true in business. A ten percent increase in profit is more likely to come from many different contributing factors, each of which comprises only a fraction of the total ten percent rather than from one element that achieves the full ten percent. Although you can’t always generate new sales when you need them, you can usually cut costs. So, let’s look at several simple, achievable money saving ideas that will help improve your bottom line.
Analyze Cash Flow
A cash flow analysis is simply performing a periodic check on your company's financial health. A projected cash flow statement estimates what your revenue will be in upcoming months or years, based on a history of sales and expenses. A monthly cash flow statement shows you where you actually are in comparison to your projections. Preparing a budget is essential for maintaining control of company finances. Even though you can show profits on paper, you may still find yourself short on cash if clients are slow-paying, or worse, no-pay and on the way to collections. You need to know where the money is, where it's going and how to get more when you need it. A cash flow analysis will help you follow the money.
Improve Collection Procedures
Collect money as fast as you can. If you were paid for sales up front, you would never have a cash flow problem. Unfortunately, that doesn't happen very often in our industry, but you can still improve your cash flow by managing your receivables more efficiently.
- Submit insurance claims and/or send private pay statements promptly – preferably within days of the sale.
- Mark the due date in bold on client statements.
- Offer a prompt pay discount to encourage early payment.
- If you do not receive payment after the second notice, try sending an internal collection notice. Use colored paper with COLLECTION NOTICE written across the top to catch their attention. To call greater attention to the collection notice verbiage, do not use your logo on this form. Just put your company contact info on the bottom.
- Identify slow-paying customers or those with outstanding bad debt and flag the accounts. Institute a policy that future transactions are cash on delivery (c.o.d.) and that an attempt should be made to collect the outstanding balance as well.
- Deposit checks and cash daily to take advantage of short-term interest on your deposits.
Managing Accounts Payable
Watch expenses carefully. As soon as you see expenses growing faster than sales, analyze costs carefully to identify redundant processes, waste, inefficient practices and other areas that can be eliminated or managed more effectively. It's important to track accounts payable in a timely manner to ensure that you know how much you owe each supplier and when payment is due.
- Negotiate dating terms with vendors to delay payments
- Dating terms deferring payment from 30 days to 45 or better yet 60 days, will also increase cash flow. Take full advantage of creditor payment terms. Always pay on the last possible day. Don't only focus on the lowest price when choosing suppliers. Sometimes more flexible payment terms can improve your cash flow more than a bargain-basement price.
- If you have accrued a debt that is more than you can pay in one installment, communicate with the vendor and try to arrange a payout over time. Now, as a long-term obligation, this will reduce your accounts payable on your balance sheet and improve your working capital position.
- Use electronic funds transfer to make payments on the last day they are due. You will remain current with suppliers while retaining use of your funds as long as possible.
- Take advantage of prompt pay incentives.
Reduce Operating Expenses
Review your major business expenses and identify areas where you can cut back or improve processes. Some expenses are fixed and out of your control such as rent, utilities and capital expenditures. But before you spend a lot of money on fancy offices fixtures or state-of-the art technology, consider other, less expensive alternatives and leasing. Don't be wasteful. Recycle and reuse what you can. The savings may not be large on any given item, but they can add up over time. And concentrate on finding opportunities where you can improve operations and save money.
- Labor. Are all your employees productive? If not, address the issues of poor performance through mentoring and additional training. If no improvement is made, let the employee go. Review your pay scale and benchmark against similar industry businesses to see if your wages are in line. Consider pay increases based on merit rather than automatic yearly increases. When money is tight, postpone hiring new employees. Consider using independent contractors and outsourcing certain nonessential functions.
- Inventory. Monitor how quickly you turn your inventory. Products that sit on the shelf eat up cash flow. Carry the main line products and special order the items that you only need once or twice per year. Regularly monitor your stock levels and if a product has been sitting on the shelf for a year, reduce the price and put it by the checkout counter for a quick sell. Utilize drop-shipping from the vendor when available. Use wholesalers if you can’t meet minimum order requirements or need a product faster that you can wait to reach a minimum order. Always check freight charges and factor in those charges when setting your retail prices. Try to negotiate free freight for more substantial orders.
- Marketing and advertising. Gauge the effectiveness of your current marketing programs and monitor the return you get on media advertising, web-based advertising, direct mail, and any other advertising methods you utilize. If it isn’t effective, try something new. Don’t keep trying the same thing if you’re getting poor results. Think out of the box. You don’t have to spend a lot of money to be original and capture the interest of your audience. When possible, work with vendors to co-op advertising costs. Try to avoid doing lunches. If you absolutely can’t get in to a referral source without food, try to set up a breakfast since it’s less expensive.
- Office supplies. Go through your past invoices and highlight the items you always need to have on hand. Then, contact a few vendors and get bids on those specific items. Let them know you're shopping for the best deal. If you have multiple locations, consider centralizing the purchase of office supplies to improve inventory control and reduce redundant purchases.
- Phone Use. Competition with telecoms is becoming fierce so shop around for the best plan. If you have multiple locations that need to communicate often, investigate the use of using 2-way phones (like walkie-talkies) so the calls are free. Whenever possible, communicate by email to save the expense of a phone call.
Prepare for Shortfalls
Finding yourself short of cash to pay the bills happens in business. The key is to prepare for that eventuality even as you work hard to avoid that situation.
- Make financial projections. Forecast both expenses and anticipated revenues annually, taking into account slower seasonal sales fluctuations like after the New Year or in the summer months. This will help you predict when you are likely to have cash and when you are likely to need it.
- Try to maintain a cash reserve if possible. If sales don't take off as expected, or if there is some unforeseen problem, you'll be better prepared to weather the financial burden.
- Arrange for a line of credit with your lending institution before you need it. Banks are wary of borrowers who need money right away. You are a much better risk if you ask before you need it. A line of credit allows you to borrow money up to a predetermined limit whenever you need it.
- When in a shortfall situation, choose the bills you will pay carefully. Start with meeting payroll followed by the bills for which you receive an additional discount for prompt pay, then move on to your main suppliers and lastly your less essential suppliers. Try to make special payment arrangements with those if necessary. If your credit is normally good, you will be surprised how easily they will be willing to work with you.
Keeping Track of the Money
Tracking the money coming into and going out of your company is the key to financial management. The best scenario for positive cash flow is delaying the pay out of cash as long as possible while collecting outstanding balances from customers as quickly as possible. The problem is the lag between the time you have to pay your suppliers and employees and the time you collect from your customers. So work hard to minimize that crucial time and utilize every cost-saving strategy that you can. Remember, cash is king.
Cindy Ciardo, BOC Orthotist and CEO of Knueppel HealthCare Services, Inc. is also the education chair of WAMES, the VP of the Continuing Care Coordinators of SE Wisconsin and is on the editorial advisory panel for HomeCare Magazine.