Most of us know that taking care of our health, exercising regularly, eating well and getting enough sleep at night has positive results on our lives. We feel inspired, energetic, ready to tackle the world and embark on new exciting adventures. The opposite is true as well. We feel sluggish and unproductive if our schedules are full of late nights, fast food and couch surfing.
Leading a profitable and successful business is no different - the business health and profitability is a direct reflection of your business strategy and your ability to effectively deliver it while continuously improving financial and operational wellbeing of your organization. In order to run a well oiled business machine, your business needs sales but it also needs to be supported by operational excellence.
Here are some main areas to consider when increasing operational excellence in your business:
1. Cut costs
Run a yearly internal cost audit of your direct and indirect costs and cut all costs unnecessary for every day business. You do not want to jeopardize quality of the product or service you offer, however often companies have a lot of fat in terms of re-ocurring costs that are not managed. Clients are often surprised during a cost review as they do not always realize how much money their business is spending in certain areas.
Challenge your team to come up with ideas how to cut costs! But remember, before cutting costs, understand the return on investment (ROI) of each of the categories you are assessing for elimination. If your online advertising cost seems high but you get most of your new clients from your online presence, you want to review how to best spend your online advertising budget, rather than slashing it.
Ask the following questions:
Where does the bulk of my cost come from?
Can I lower any costs without negatively effecting my business performance and bottom line?
Which supplier can offer the best quality at the best price?
What interest and bank fees, admin fees and recurring fees is your business paying that can be avoided?
2. Improve cash flows
Review payment terms (if contracts allow it):
Speak to your suppliers to negotiate longer payment terms or a discount on early payments to them.
On receivables side, offer your customers a small discount if they pay you within 1 week.
Have your team follow up with customers for prompt payment collection.
Establish a credit facility:
Having a credit facility or a line of credit established for your business is a must. It not only offers your company flexibility in terms of daily cash flow management, but also allows your business more liquidity for investment purposes. Negotiating credit facility terms when you are in position of business strength and are not in a rush need for financing will give your business more cash flow flexibility at the right cost.
Hedge your foreign exchange transactions:
If your company has transactions in foreign exchange currencies, buying a derivative to hedge your future transactions will benefit your organization in terms of visibility of future local currency cash flow and profitability.
Invest your excess cash in overnight or other short term deposits:
If your business is sitting on excess cash every day, consider investing it for short periods of time so that your business makes interest on your excess cash. You want to be mindful of your business cash needs when placing a deposit. Most financial institutions allow you to make deposits over the phone or online. You just specify the amount you want deposited, for how long (overnight, 1 day, 1 week etc) and from which bank account.
Offer continuity sales deal:
Consider offering your customers a discount if they "subscribe" for a continuous flow of your products or services over a period of time. This will improve your revenue as well as cash flow performance.
3. Become data driven
It's all in the numbers. Whether you analyze your business data and financial results yourself, or you rely on accountants, consultants and other professional experts, frequent reviews of your financial and business data reveals your strengths and areas of opportunity (aka weaknesses). Bringing an external consultant offers a valuable perspective and a fresh pair of eyes. Remember to set yourself and your team new goals to improve in the top 3 weak spots your business faces at each review. This will not only provide your business with continuous improvement, but it will also ensure your teams are focusing on activities that support your strategy and positively affect your business performance.
Companies who embrace continuous improvement adopt an organized approach to assessing their current performance, outlining goals and initiatives to improve, and continuously move through the cycle of assessment and implementation of improvements quarter after quarter.
Yours in business,
Lenka Bolton, CPA, CMA