Know your costs as you re-energise your business
3rd August 2020
Looking at your costs for the year needs to be a priority if the landscape of your business has changed.
In order to manage your business effectively, you need to have a good grip of all your numbers - especially your costs. When things go through a dramatic shift, such as we’ve seen with recent events, you need to take a close look and re-evaluate, so you know exactly where things stand at any given moment.
Direct costs (aka variable costs)
In theory, if your sales fall to zero, so will your direct costs, and it’s important to make sure that this is the reality as far as possible.
Start by reviewing work that’s in progress. Look at every open order and projects which are underway. If the scope of work has changed, you may want to adjust supply orders.
Take a look at the margins too – the difference between your direct cots and the revenue you receive. If there is a significant increase or decrease in the gross profit you make, you may want to re-examine the costs for those lines.
Take a look at what you can do with your inventory. Your inventory can often be a significant cost, so it’s always worth looking at it regularly. Will your supplier accept a return? Or can you sell it on to someone else?
Also check that anything ordered before COVID-19 which hasn’t been delivered yet. Is it still needed and, if it isn’t, what can you do? Can you defer the order or cancel it? If not, how will you cover this additional cost?
It is also worth looking at your inventory ordering policies too. Are the thresholds you use to trigger repeat order in line with current volume, for example? Or are you buying at high volumes to get a price-break but then paying more to store it? It is always worth asking suppliers if they can support ‘Just in Time’ ordering – which means you only order (and therefore pay for) items as you need them.
This is always one of the hardest areas for any business to consider because, of course, you’re making decisions that will have a direct impact on other people’s lives. It is really important that you get professional advice from an HR specialist as you review your people strategy.
If your business has been hit hard by recent events, then you may have to make some tough decisions in the months to come. Get clear on the number of people you can realistically afford to retain in order to stabilise and re-energise your business.
You may however, like some of our technology and communication clients, find yourself in the fortunate position that your business is thriving through this time. This could mean you’re thinking about hiring new people, so you’ll need to factor in costs for recruitment and training.
Finally, ensure you’re receiving all your statutory sick pay and furlough allowances where appropriate.
One of the biggest business learnings these recent months have shown us is if and how our teams can work remotely. How has this worked out for your business – do you now have an opportunity to consider reducing your office space and the obvious costs that go with that?
Don’t forget to check if you qualify for small business rate relief too. This often gets forgotten and it can make a big difference to your costs.
Were you able to negotiate any rent relief on your business premises during lockdown? If you did, you need to ensure you take into account this cost restarting again and decide if you can afford it.
Check in on your marketing spend and support services. Are they still in alignment with where your business is going? Are they bringing you a return on your investment that makes them worthwhile? Are they targeting the right market (which may have changed)? Are you paying for subscriptions and computer apps that you no longer need or use?
Which area of your business shows the highest proportion of your costs? Again, look at whether these are still valid or if you can trim back these costs or remove them all together if they’re no longer needed.
Also consider where you can save costs. Often there are things that aren’t necessarily a big spend, but if they’re not really needed or being used, removing those costs can add up to a helpful saving.
Always look across the whole system too – not just at each step in isolation. A small extra expense in one place might end up creating a big saving elsewhere.
Once you have given all your costs a once-over, take another look at your cashflow forecast – it may give you a more optimistic picture but also highlight where you might also want to focus on your income to further improve the picture.
To give yourself the greatest chance of re-energising your business, make sure you know your numbers and are crystal clear on all your costs!
At Grant Jones we specialise in helping you identify and understand your costs to help you put your finger on the pulse of your business. Call and speak with our team about how these can help you move your business forward.