NatWest Business Builder: Cost structure
With their eyes on the prize, it’s easy for SME owners to overlook some of the outgoings that can seriously dent the bottom line. Here are eight ways to make smart savings.
1. Don’t be a supplier’s cash cow
“SMEs rarely invest in procurement training, so you have people making quite significant buying decisions without knowing anything about negotiating,” says Chris Aston of cost-management experts Expense Reduction Analysts. These staff are often not motivated or incentivised to make sure they’re getting the best value for the business, he says, which means you may well be a ‘cash cow’ to your suppliers.
“You’d be mortified to hear this,” says Aston. “You’d obviously rather have suppliers feeling that they have to work really hard for your account and that you get the best value of all their clients.”
The answer may be to bring in procurement consultants to negotiate better deals – but educating staff is a good place to start. “You have to get employees spending company money as if it was their own,” says Aston.
2. Claim capital allowance relief
“Tens of thousands of businesses could be sitting on a potentially significant tax windfall in the form of capital allowances relief,” says Mark Tighe, MD at tax specialists Catax. “It concerns the ‘intrinsic fabrication’ of a commercial property, and qualifying items typically include pipework, cabling, air-conditioning, heating, lighting, security and communications systems.”
Tighe says, in his experience, the average net tax benefit to a business is £46,000, but that nine out of 10 SMEs have never made a claim for it. Why wait? An expert firm will often tell you for free whether or not you’re eligible for tax relief.
3. Don’t waste money on pay-per-click
That’s unless you know exactly how it works. “I’ve seen companies that almost seemed addicted to it,” says Andrea Sexton, director of Andrea Sexton PR. “There’s a certain buzz that comes from seeing your brand on the first page of a Google search and above all the organic results, but when every click is going to take cash out of your bank account, it’s imperative you’re confident visitors have a very real chance of buying, and that your margins are sufficient to make the cost of the advertising worthwhile.”
While pay-per-click does work when used correctly, there are probably other basics that need taking care of first – such as making sure your website is truly reflective of what you do, says Sexton.
4. Make sure freebies are being used
Peter Fleming, director and adviser at Business Doctors, used to work for a major car manufacturer and says the company saved £90,000 a year when it got rid of free vending machines that were barely being used.
“A kettle and some tea bags were just as good for the staff,” he says.
Another top tip of his is to outsource debt collection. It can cost as little as £20 an hour, which is a fraction of what you may have to pay running up your overdraft, making late VAT payments and dealing with other cash-flow issues.
“When every click is going to take cash out of your bank account, it’s imperative you’re confident visitors have a very real chance of buying, and that your margins are sufficient to make the cost of the advertising worthwhile”
Andrea Sexton, director, Andrea Sexton PR
5. Do it for a ‘Fiverr’
“The gig economy enables small business owners to find services online at much reduced rates,” says Archna Tharani, director of the newly launched Small Business Finance School, which helps SMEs make sense of their numbers. “You can find freelancers on websites like Fiverr and People Per Hour to get jobs done quickly and cheaply – but it’s always a good idea to get recommendations, as it can sometimes be a false economy when you end up paying again to get the work done if it’s not up to scratch.”
Fiverr in particular can be a boon for those in need of low-cost visuals like logos, but even complex areas into which you might want to make a tentative foray – such as market research and SEO – may be worth a look when just £5 will buy you a short contract with someone whose feedback suggests they know what they are doing.
6. Make pension contributions through your limited company
Tharani’s second tip is that your company can make employer pension contributions for you. “The pension contributions are an allowable deduction in calculating the profit of the business,” she says. “This will lead to a saving in corporation tax.”
As a result, you get extra in your pension and the company pays less tax. “It’s a win-win,” says Tharani.
7. Find partner brands
“As an early-stage challenger telco brand, we needed to generate product awareness with UK SMEs and start-ups,” says Damian Hanson, co-founder of online phone system CircleLoop. “But we found the cost of traditional advertising channels very prohibitive. Instead, we’ve focused on developing key partnerships with businesses that target similar customers with non-competing services.”
Hanson says these mutually beneficial relationships can generate faster volume at a lower cost. CircleLoop tends to seek out two distinct types of partnership. The first is the promotional partner, such as a business that serves the same or a similar customer base and can benefit mutually from joint campaign activity. “The second is the integration partner, a business that offers complementary software-as-a-service-based products into which we can integrate our service,” says Hanson.
8. Bootstrap until you’re 100% ready to expand
The best way to not waste money when starting out is to forego the trappings usually associated with running a business (office, staff, hardware and so on) – something Barnaby Lashbrooke, founder of virtual assistant platform Time Etc, discovered too late when launching an earlier business. “I burnt through cash by hiring staff and renting office space before I needed to – a mistake I’ll never repeat,” he says.
“My advice to other SME owners is to outsource tasks, use freelancers you trust and don’t leave your home office/kitchen table until you’re really ready to expand.”
Further Reading
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