Managing Your Cash Flow

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4 steps to controlling costs

4 Mins

In my family there are a variety of approaches to spending money. One family member has a very generous pension, owns 100 per cent of the equity of four houses and gets a steady stream of rental income; he also has plenty of cash in the bank. Yet he drives a small, old car. When challenged, he says that cars don’t matter to him. Further, he finds that if he thinks that he’s wasted money, he feels physically ill.

In contrast, another family member has big debts and virtually no assets. Yet he owns a luxury car with a three litre engine which spends most of its life on the petrol station forecourt being filled up. It’s a different way of thinking.

What has all of this got to do with business? Well managing money is a key skill in business, and each of us has a natural inclination towards the way we spend. Most of us probably fall on the spectrum between the two extreme cases outlined above.

Challenge nature

The point is that we need to be aware of our natural tendency when it comes to spending. Yet despite this we must try to help ourselves make the right business decisions. It’s important to remember that decisions we make by instinct may not be right.

I always remember listening to Sir Terry Matthews, a self-made billionaire, and owner of Celtic Manor, of Ryder Cup fame. He said that he always provided his technical staff with state-of-the-art tools. Although these were expensive, they were a huge motivator for these types of people so it was money well spent. What struck me was his willingness to spend, but there had to be a well thought through reason.

The rules of spending

It’s from this, and many other experiences, that I have come up with my cardinal rules for business spending:

1. Never, ever, ever run out of money

The result will be either you go bust, or you are at the mercy of whoever lends or invests in you. So make sure you have a firm grip on your cash, and a forecast of where it’s going, even if it’s very basic. Another way of saying this is, don’t spend money that you don’t have.

2. Don’t waste money

It’s all too easy to get into bad habits when times are good. High costs are never good, even when profit margins are high. They set you up to be destroyed by a nimbler and lower cost competitor who comes along later.

3. Spend when you have to

Machinery that breaks down, constant staff turnover to find higher wages, and not getting critical legal agreements reviewed by lawyers are all examples of where ’saving’ money may cost big time in the long run. Sometimes small perks for staff can have a big motivational value, even though the cost is low.

4. Regularly look through the accounts and find where the big costs are

The largest savings are usually available where most money is being spent. It can also be amazing to find cash still going out on things that made sense a few years ago, but are now well past their sell-by date.

Boring is good

There’s not that much written about applying intelligence to spending, because, let’s face it, the subject is boring. However, it’s half of the equation to making a profit, and few businesses can succeed in the long run without getting the balance right.

Chris Barling is CEO of SellerDeck.

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