Cost management: Five tips for improving cash flow

Bogdan Büchner

Among the most important targets of cost management for a small business is ensuring that it has a positive cash flow. The higher the positive cash flow, the better for a business. It enables the company to pay its bills on time, to grow by adding staff or opening a new branch, as well as to set aside money for lean times, such as during a recession, for example.

Here are five tips to help your business handle its cost management to achieve a positive cash flow.

1) Institute strict cost management guidelines on how money is spent

In order to keep a handle on expenses, a business needs carefully to monitor how its money is spent. A rash of spending can play havoc with cost management and cause monthly cash flow to dip into negative territory. If employees at present have unlimited authority to spend the company’s money, it is critical to control such spending. Each employee should be required to file an email request justifying each purchase above a predetermined dollar amount. Requests should be assessed in terms of necessity and cash flow by a person in authority. They should decide whether they can be approved, delayed until later, modified in some respects, or eliminated completely.

An e-procurement system can help in this regard. It is a good idea also to institute a policy of reimbursement for travel and similar expenses. Failure to do so could result in excessive spending on unnecessary travel or such costs as hotel stays.

2) Dig deeper into spending processes

To get a better handle on cost management, you might want to inquire more deeply into the nature of the items on which you are spending money and whether they are really required. Take into account even the smaller items. Avoid such categories as “general expenses” so that you can get a better handle on just what each expense is. Another assessment, depending on the nature and makeup of your company, could be to check on which departments are spending more than others.

3) Obtain better deals

As you dig into the items on which you are spending, examine whether you can be more effective in cost management by securing better deals on major monthly expenses. It might be possible, for example, to buy your own equipment instead of leasing it or, if your equipment is outdated, you might want to consider leasing new equipment. It depends, of course, on the use to which you are putting your equipment and what the difference in costs is between leasing and buying new equipment. Another aspect at which you should look is to determine whether the distributors from whom you regularly buy your office supplies or other materials have raised their prices over time almost without you noticing. You might obtain better prices from other suppliers.

4) Extend payment terms

Should you find that regular payments to vendors are hindering your ability to improve your cash flow, you might want to improve your cost management by looking at whether you can obtain better payment terms. Talk to your top vendors and determine whether you can renegotiate the terms of your agreement with them. You could discuss changing net 30 days payment to net 60 days, for example. Similar arrangements might not be as easily achieved with smaller vendors who depend on receiving their money within the month, but it’s worth a try.

5) Cut unwanted costs

When determining how to cut back on expenses, good cost management demands that you do not simply cut cash outflows across the board or aimlessly. It might save you money, but it might hurt your business and cause more harm than good. It is a good idea, therefore, to cut only those costs that are unnecessary or less important for your business. Are all those magazine subscriptions necessary, for example?

Here’s another thought: Filing your documents electronically on the cloud ensures that they are safely stored, readily available and searchable. Doing so will save costs on printing documents and storing them in filing cabinets. Overall, determining exactly where your money is being spent each month will enable you to cut costs more effectively and more efficiently.

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