Your company’s profitability depends not only on sales but also on effective cost management. Are you adequately addressing the cost side of the business equation?
Analyze Your Cost Structure
You probably can readily identify the products and/or services that are generating your greatest sales volume. But can you identify all the costs associated with providing each product or service? Only when you know your true costs can you effectively allocate resources to the work that is most profitable for your company.
Actively Monitor Operations
As the busy owner of a small business, you can’t be everywhere all the time. But you do need to stay in circulation, regularly observing the day-to-day operations of your business and talking to your managers and employees. By staying visible and encouraging an open dialogue, you’ll be in a better position to uncover costly problems before they seriously erode your company’s bottom line.
Even if you are satisfied with a current vendor, you may want to talk to the competition from time to time. You won’t necessarily want to switch vendors simply because you are quoted a better price. But you may be able to use that price in negotiating more favorable terms from your existing supplier.
Watch for Discounts
In the interests of cash flow, your company may routinely pay its bills only when they come due. While this generally is a sensible strategy, it may not be wise if you are passing up generous cash discounts for earlier payment. In the current low-interest rate environment, borrowing the funds you need to take advantage of discounts may be a better move. For example, suppose a vendor offers your company a 2% discount for paying a $10,000 invoice 20 days early. Passing up the discount will cost you $200. Instead, you might borrow $9,800 from your bank, pay the discounted invoice, and repay the loan in 20 days. If the rate on your bank line of credit is 8%, you’ll owe about $45 of interest — for a net savings of $155 on just one invoice.
Effective cost management requires good information and careful planning.