The number one reason small businesses fail is due to poor cash flow management. There are two main reasons why poor cash management occurs: either you are not bringing in enough money or you are spending money faster than it is coming in the door.
Sure, there can be other reasons, such as making poor business decisions, but these decisions are a direct result of the two causes I listed above.
Let’s explore the latter of these two causes: spending money faster than it is coming in the door.
As the owner of your business, it’s your job to make sure the wheels keep turning, and let’s face it, there will be times when you will look at your financials and notice cost creep.
Cost creep is when your expenses steadily increase across the board over a period of time without your direct knowledge. It is most noticeable when cash is tight or when your business is in a growth mode. When you begin to see this happening, it is most likely time to conduct what I call a “Cost Audit.” I typically recommend that you do this a minimum of twice a year, once mid-year and again at the end of the year when you are preparing your budget for the upcoming year.
Step 1 – Determine Where You Are
The first step to conducting a cost audit is to determine where you are. This means taking a look at your financials and analyzing your costs. Evaluate how you are doing so far during the year compared to your budget and goals. Are you on track to meet your goals or do you need to make adjustments to some line items? Look at the costs for the current year and also compare them against prior years. Make a note as to whether there are known reasons for the increases. This will begin to show you the costs that are way over budget that you may not have been aware. It will also reveal the areas where money is slowly leaking out of your business.
Step 2 – Determine What Must Change
Make a list of all of your costs to date with four columns for each one. Title the four columns:
- Do I really NEED this expense?
- What is my ROI on this expense?
- Is there a LESS EXPENSIVE alternative for this expense?
- Can I CUT this expense all together?
Answer these four questions for each cost. This will shed light on the expenses that can be reduced or cut completely.
Step 3 – Implement Your Reduction Plan
It’s time to work. For those expenses that you don’t need or don’t yield you an ROI, cut them immediately. This is usually where clients realize they are paying for the “gym membership” they never use. For the expenses where you have identified a less expensive alternative, start exploring those options. Research them to see if they can work for your business. If they are software related, check out my post How to Choose the Best App for Your Business before making any changes.
Take note: depending on the nature of the expense, some can be cut or reduced immediately while others will have to decrease over time.
I hope this helps you determine your short- and long-term future. Good luck!