As a general rule, the more cash your company can keep on hand, the better. The phrase “cash is king” takes on new meaning in the middle of a recession or downturn, when your sales might have dipped and your revenues have fallen. There are many things you can do to help your business survive a downturn, such as finding a way to pivot and offer different products or services or finding a way to reach new customers. Cost-cutting is another survival tactic to use. If you aren’t sure where to get started or what expenses you can safely cut, here are a few ideas.
Inventory
When sales are slow, it can make financial sense to cut back on the amount of inventory your company orders. A product that isn’t moving as quickly as it once did can eat into your operating costs in a couple of ways. First, it is likely to take up space on your store or warehouse shelves. You end up needing to rent more storage space to house the products that aren’t moving. Stale inventory can also take up room that would be better used by items that are still selling.
Second, purchasing more inventory than you are likely to sell in a particular period eats into your cash reserves. It might be worthwhile to adopt a just-in-time inventory system so that you have just what you need.
Non-Essential Expenses
Many business expenses fall into the “nice to have, but absolutely necessary” category. A few examples might be regular deliveries of fresh flowers, catered lunch meetings and certain travel expenses. Take a close look at your company’s overall budget to see where its money is going each month or quarter. The odds are likely that there are quite a few expenses you can cut without missing them.
It’s also possible that there will be expenses you don’t think of as “non-essential” but that actually are. Any expense that isn’t absolutely necessary for your company’s continued existence can be considered non-essential. For example, if you pay to use certain software programs, do some research to see if an equally good free version is available. When business picks back up again, you can always add non-essential items back into the budget, if your financial situation allows.
Rent
At the height of the COVID-19 pandemic, when many businesses were forced to close their doors for weeks or months, many worried about not being able to pay their rent. If your company finds itself in a similar situation, it can be worthwhile to closely examine your rental expenses and see where you can make cuts. If you aren’t using a rented space, it can make sense to try and sublet it to a company that can make better use of it at the moment. Another option is to try to negotiate with your landlord to either end the lease early or to arrange for a discount on the monthly rent.
If leases are going to be coming to an end during a time when money is tight for your company, consider whether you need to continue to lease the property at all. It might make more sense for you to move out of the building in an effort to lower your monthly expenses.
Capital Expenses
During a recession, you may need to take a close look at your plans for expansion or your plans for purchasing property or other big-ticket items. The same is true of property your business might already own. Now is the ideal time to ask if your company needs to own it or if it would be a better move to sell real estate or to make do with the equipment you already own.
Payment Processing Expenses
Some expenses seem negligible but can end up having a significant impact on your company’s bottom line. One example is payment processing fees. Payment processors typically charge a fee every time a customer uses a credit card to make a purchase. The fees are usually small, such as 2 or 3% of the total transaction amount. Over time, they add up. Fortunately, there is a lot of competition in this area and it is possible to switch to a company that charges a lower fee. Even changing from a payment processor that charges 3% to one that charges 2% will reduce your company’s expenses considerably.
Cutting expenses is just one way your company can weather a recession. Getting a clear picture of where your business stands financially and gaining an understanding of what options are available to you will also help keep you afloat. The virtual CFO team at New Direction Capital is available to help you navigate your business’ complex financial situation. Contact us today to hire your virtual CFO.
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