Joseph is the CEO of SnapAds, which helps local businesses find, keep and reward customers.
For small-business owners, it is crucial to prepare for financial challenges, especially in uncertain economic times. The Federal Reserve’s recent announcement that they won’t raise interest rates unless needed is a hopeful sign. However, with inflation still above the 2% target, and employment at record lows, the Fed is expecting things to get worse.
To position your business for success even in uncertain times, it’s important to be proactive and explore all options. Based on my experience, here are several ways to increase revenue, cut costs and exercise caution around financing to help your business succeed during uncertain times.
Increasing Revenue
Finding ways to increase revenue is one of the best methods for solving financial pain. In addition to traditional methods like marketing and finding new customers, technological advancements are allowing businesses to find higher revenue from small adjustments. For example, using AI and chatbots to analyze customer touchpoints and personalize experiences can lead to higher gains from your existing customers.
Offering existing customers a loyalty program can also increase cash flow and boost sales. Consider offering benefits like buying five items instead of one for a large discount. Discounts may seem to cut into profits, but making customers happy can alleviate some short-term capital needs. Here’s an example: For one of my businesses, we are looking at buying a year’s worth of OSB board in advance at a lower price, and the lumber store has agreed to store it for free. As a customer, I am grateful they gave me the opportunity, and as the business, they were able to get some sales in advance to avoid borrowing. Increasing sales and giving customers a reward for continued business gives them a reason to want to assist in your time of financial need without needing to make them aware of that need.
Going through your inventory of supplies and offering discounts to customers can also turn a sitting asset into cash. For example, if your business is in roofing or plumbing, putting together all the supplies lying around and giving a discount to a customer can be a big win for both you and them.
Cutting Costs
Cutting costs is another way small businesses can prepare for financial challenges. Several ways to reduce costs include renegotiating contracts with suppliers, reducing energy consumption, downsizing office space and outsourcing non-core functions to reduce overhead costs.
Managing inventory is always a difficult task, but the right inventory management software can help reduce the amount of money spent on inventory and increase profits. Using software to track customer orders and sales can help businesses identify areas where they can save money by reducing waste. Additionally, utilizing cloud-based services for data storage and communication can reduce IT costs by eliminating the need for expensive hardware and software. A better understanding of all of your inventory can help you predict how to turn those assets into cash and not deplete cash for supplies that will only sit for months without need.
In hard times, cutting costs requires a new perspective and creativity, such as working with employees to take a pay cut in exchange for a small percentage of ownership in the business or a percentage of profits in the future. This is a great way to lower costs and get team members more invested in the success of your business.
Another way to cut costs is by working with your suppliers. They, too, are trying to grow sales, but they might be larger and have better access to capital and, therefore, be willing to allow a longer time between ordering and paying or even offer some price benefits or a more committed relationship in the future. All businesses have an opportunity to show commitment and appreciation to their customers, including suppliers who want to keep you as a happy customer for as long as they can.
Financing
When it comes to financing, it’s important to consider borrowing money as a last resort. Careful consideration should be given to the type of loan selected. An effective way to finance needed capital is by offering better pricing to customers for larger upfront contracts. This provides the necessary funds upfront, keeps the customer happy and can be cheaper than taking out a loan with complicated loan fees and payment schedules.
Develop a recession plan, including a detailed analysis of financial projections and contingency plans for unexpected events. To reduce the need for borrowing, it’s important to have a business plan that outlines specific triggers and corresponding actions. Triggers can be identified in various situations, such as a 20% decrease in sales in one quarter, which would require sub-leasing part of the warehouse, or if payroll expenses increase to 80% of total costs, resulting in the need for layoffs. Developing these triggers in advance can assist you in preparing for the future and making challenging decisions. It’s also important to have a clear understanding of the business’ financial situation and to only borrow as a last resort. I recommend having a team of advisors in place to help with decisions, planning and financing during challenging times.
After all alternatives have been considered, like downsizing to a smaller location or implementing remote work, taking out a loan may be a viable option. It is essential to choose the right type of loan, as interest rates can vary. While a home equity line can provide quick access to funds, it typically comes with adjustable rates. SBA loans can have great payment terms but usually float around 3% above prime, which would be over 10% in the current market.
During challenging times, it is important to be prepared and set your business up for what lies ahead. Coming up with a plan and mapping out different scenarios will help in planning different events that could take place. It can also give great insight into ways to increase revenue and cut costs at times when it is most needed.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here