Credit or cut? When and how to reduce costs in your business

The current economic climate brings increased focus on managing expenses and financial efficiency. As a result, many finance teams are preparing for the worst.

Financial planning is a good way to prepare for possible outcomes. In our previous article, on mastering cash flow forecasting, we took you through how to forecast your finances with three scenarios: a base case, an upside case, and a downside case.

So, what do you do if you’re on the way to your worst-case scenario?

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When do I need to start cutting costs?

Forecasting will provide you with benchmarks to know which scenario you’re heading towards. You need to ensure you have the right KPIs and regularly monitor your finances. Choosing which KPIs are most meaningful for your business can give you fair warning before things get critical and you need to take drastic action.

For example, if your downside case is -50% of your gross margin, and you notice three months into the period you’re tracking at -20%, you may need to take action.

If you’re moving towards a downside case, you may consider reducing fixed costs, being ruthless about what generates business and what doesn’t, and looking at credit solutions. When cutting costs, you generally want to avoid several smaller subsequent cuts by being thorough in the first place.

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Reduce your costs

In many cases, the first place to start making changes is by reducing your variable, and where possible fixed, costs to run your business in a leaner way. An in-depth understanding of your expenses can help you understand where your capital is going and how you can cut back.

Here are some common areas for improvement:

● Renegotiate with or switch suppliers.

● Reduce running costs like energy, internet, and communications.

● Cut unnecessary expenses such as redundant subscriptions.

● Consider where you can optimise transport and storage.

● Monitor your marketing and prioritise top-performing campaigns.

● Consider remote working to cut down on office size and overheads.

● See whether outsourcing work will reduce costs or alternatively reduce contractor’s days.

When looking at where to cut costs, a deep understanding of your finances and access to the right data from across your organisation is crucial. It’s also essential to understand each business area's operations. Looking solely at numbers is one thing, but you want to ensure that teams can still function with a reduced budget.

Financial automation tools like Juni, expense management software, and accounting automation can reduce the complexity of putting financial information together so you can focus on turning it into usable insights.

Improve operational efficiency

Being ruthless about what generates business requires an understanding of other business KPIs and starts to blur the line between CFO and COO. Looking at business efficiencies also considers variable costs too.

Finance teams need to understand the business in a detailed way to recommend operational changes to reach your desired financial state. In practice, this could mean reducing your assortment by cutting underperforming products, reducing your number of SKUs or changing your business model.

It’s also important to turn numbers into usable insights. Tracking KPIs and noticing a decrease is one thing, but understanding why and how to rectify it is another.

For example, if revenue has dropped 10% since the previous month, simply demanding an increase of 10% the following month may be useless to other teams. You need to understand who you’re communicating with and choose a KPI they can act on. Instead, investigate. In this example, sales were down because it took customers longer than anticipated to complete the checkout process, with some abandoning it altogether. You can then focus efforts on fixing the issue.

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Consider credit solutions

If you’ve cut costs and improved organisational efficiencies and you’re still in need of cash, credit solutions can help with your runway. There are many options to choose from, and it’s key to understand which is best suited to your business needs.

Loans, credit cards and overdrafts are longstanding methods of securing funding, but they’re susceptible to changing interest rates in the current climate.

Revenue-based financing allows borrowers to repay a loan as an agreed percentage of gross monthly profits instead of at a fixed rate.

Credit lines can offer flexible financing to ease your cash flow.

It’s important to consider the long-term impact of securing financing, especially on how interest rates could be affected in the coming year. Although a fixed-rates could seem appealing, securing this when interest rates are high could mean you’re paying more than you can afford when the rates come back down.

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Look to the future

Before taking any drastic actions, it’s essential to forecast the outcome and continue to track your KPIs to measure if it’s successful.

Continually monitoring and optimising your expenses can be critical to a successful strategy to turn around a downward trajectory