If your small business is like many others in South Africa, your funds may be depleted as a result of the COVID-19 crisis and national shutdown. It could also be the case that your cash flow is under pressure, with more money going out than coming in. You may be spending on your overdraft or credit card to keep afloat. You may need to think about different ways to save money.
If so, this is a moment to identify operational cost savings so that you can start building up your reserves again. Even if the above doesn’t describe your situation, we live in volatile times and it makes more sense than ever to run a lean, cost-efficient business. Here are a few ideas about how you can reduce your cost base and increase profitability:
1. Try the bartering system
As old-school as it sounds, bartering with other small businesses can be a great way to save some money. For example, if you’re a web developer and you have a good relationship with your accountant, you could offer to build them a WordPress website in exchange for help with your tax return. Such an arrangement does need to be fair for both parties, meaning the value exchanged should be similar.
2. Try the second-hand market
Rather than spending money on fancy office furniture, a new delivery bakkie or the latest office equipment, you can look towards the second-hand market to save money. You can often pick up some gently used bargains from other businesses or second-hand stores at prices that are significantly lower than those of brand-new goods.
3. Shop around
If you have been loyal to the same mobile, internet, insurance and banking providers for a while, it might be a good time to check whether you are getting value for money. Get some quotes from your providers’ competitors to ensure the pricing is fair. It can also be helpful to check whether you are on the right package or plan – for example, are you paying for lots of megabytes of data on your SIM that you never use?
4. Buy in bulk
If you go through a lot of coffee, printing paper, staples and other sundries each month, you might be able to save money by buying in bulk. You can also keep your eyes peeled for specials, for example, Black Friday promotions in November. There are two pitfalls to be wary of, however. The first is not to horde perishable goods that you won’t be able to use before their sell-by date—food products, for example. The other is not controlling usage of the products you have bought, with the result that you end up going through more toilet paper or pens than you ever did before.
5. Decide where to DIY and where to outsource
In some cases, it will make sense to outsource work because paying someone else to do can be cheaper than the value of your own time. In other cases, especially if things are a bit quiet for your business, it might make sense to take on work you used to pay an external company or contractor to do. Post-COVID, the economics might have changed, so revisit your approach.
6. Pay off short term debt as quickly as possible with your savings
Many small businesses have had to borrow money to keep running through lockdown. Once you’ve identified potential cost savings, redirect the money towards paying off your overdraft or credit card as fast as you can. The interest rates are punitive for short-term debt and the compounding effect can be a killer.
Also, pay your creditors at just the right time. Don’t be late because that is bad for your relationship with providers and could result in interest or penalty fees. Unless you are given an incentive for early payment (i.e. a discount), don’t feel obliged to pay a supplier or service provider earlier than the terms and conditions or contract specify. If you have 30 days to pay, that’s a month of interest you could be earning or an opportunity to avoid borrowing to make another payment.
7. Literally save money – as in putting some in the bank each month
Having savings in the bank is just as important for small businesses as it is for individuals. Putting some cash into a rainy-day fund can help you to avoid needing to borrow if your business faces a cash crunch in the future. It also gives you a reserve of funds to use for big purchases or expansion plans in the future, with no need to seek credit. Finally, you can also earn interest on your deposits, allowing you to benefit from an extra, passive income stream.
Positioning to thrive
Making the right decisions about where to save money and where to invest now will position your business to thrive beyond COVID-19. This is an opportune time to look at your operations and decide where your financial priorities lie. It can help to speak to your accountant for informed advice about cost-saving measures in your business.