All businesses share the need to maximise profit. Whether those profits go into your own pocket, into the pockets of shareholders or are earmarked to be ploughed back into the business, the greater the profits, the greater the measure of your business success.
So how can you maximise your profits? Once you have identified and measured your key profit drivers, you should be able to develop strategies to grow them. So the most obvious way to make your business more profitable involves looking at ways to increase income – usually in the form of sales revenue.
But it is not the only way to improve the financial wellbeing of your business. You could increase your profits without putting on a single extra sale if you can decrease your costs.
Cost cutting needs to be done carefully. Done wrong, and it will result in penny pinching that can alienate employees and customers, and even make it look as though your business is in trouble. The professional approach is to look at your competitors and benchmarking your business to see where you can save money.
The forgotten costs
Making savings can mean many things. Changing to more efficient lighting could reduce your energy bills. Finding new suppliers who can provide the things you need at a keener price night cut your monthly outgoings.
But there is a class of supplier which is often overlooked on cost-cutting drives. Your financial providers. The chances are that your business has borrowings, which can range from the finance to buy your premises and equipment to various forms of funding designed to keep your cash flow positive.
The cost of this finance might not be forgotten – it will make a serious impact on your bottom line – but the possibility of reducing that cost may be overlooked when you are thinking about cutting costs elsewhere.
This may be because it is easy to believe that your arrangements with financial suppliers are fixed, and that you are tied in. Nothing could be further from the truth
You can change your financial providers, just like any other supplier. And that means you can cut the cost of one of the biggest drains on your profitability – your monthly repayments to lenders.
Getting a better deal on your finance
You may feel that business finance can have a lot like firefighting. Any finance will do when you need to keep your business afloat – but like any distress purchase, the lending you arrange in an emergency will be expensive.
Having the right strategy and the right finance in place before a crisis could help avoid the need for firefighting in the first place.
So there are two ways to organise your finance to maximise your profit. Plan ahead to find a better deal when you need it – and switch to a better deal to replace your existing arrangements by refinancing.
A clear view of your financial needs will make it easier to plan ahead and to secure the funding you need at the lowest possible rates and the most favourable terms.
Look at the operational challenges you face:
- Staffing costs
- Premises and overheads
- Materials costs
- New technology
- New challenges from competitors
- The need for marketing – especially online
- Obsolescence of plant and equipment
- The need to fund growth
Once you have identified the particular business challenges that you need to answer, you need to look at the most appropriate type of funding for each one. It is rarely just a matter of arranging a generic business ‘loan’. Each type of challenge can have a different solution.
Getting the right solution for any given business purpose is vital because it means lower costs. For example, if you need a new vehicle, you should probably look at an asset finance solution. Leasing or HP will have lending secured on the equipment itself reducing costs compared with a generic loan.
There is a wide range of specific financial solutions designed for buying premises, for dealing with problems with cash flow, for customers who pay late, for unexpected tax bills and more.
Once you have identified the financial challenges, the next step is to identify the most cost effective financial products to answer them. The key is to do this before your need for finance becomes acute. Having the chance to shop around, to get the most appropriate form of finance and even to play different lenders off against each other to get the best deal can make major savings on the monthly repayments your funding need will generate.
The benefits of planning ahead don’t stop with reduced costs. When you need for finance as part of planned expansion, you will already know exactly what that finance will cost, simplifying your decision-making process. When an emergency does come along you have a lifeline ready and waiting, and when you see an opportunity, you will know exactly what it will cost you to grasp it.
Refinancing to cut your existing costs
If you realise that you have a business loan or loans with a high rate and repayments you may be able to cut them by refinancing. Refinancing is simply the process of replacing an existing loan with a new financial arrangement. The new loan pays off the current debt.
You will be faced with a new debt with a new lender, but your new debt should have better terms or features that are a better fit for your business, and which will improve your financial position.
Lenders vary greatly in the interest they charge. By refinancing to a lower rate, and perhaps to a more suitable type of loan, it may be possible for your business to save on interest costs. However, you can also refinance your borrowing into a longer term.This could reduce your monthly outgoings by giving you longer to repay.
If you have several loans running at once, you may be able to consolidate them into a single loan.
Of course, few people running their own business can expect to be an expert in finance, so whether you are planning ahead or dealing with some expensive decisions in the past you may find things easier with some expert help. Business finance has moved on a great deal in recent years. Getting the best deal is no longer simply a matter of calling on your bank manager and relying on their generosity. The fact is that since the financial crisis many banks are a lot less helpful to small businesses than they once were. Fortunately, there are now many specialist and alternative lenders who will be keen to do business with you.
Of course, not all lenders will be able to offer the funding you really need, and only one will be able to offer you the lowest price. The final step in getting the finance you need to build your profits may be to call in a business funding expert who can look at the entire business lending market to find the solutions that are right for you and your business.