Can my business afford to buy this right now?

An e-commerce client came to us with a question: “can I afford a larger storage unit?”

This is how we helped them answer it:

1) Is it a ‘good’ cost?

‘Good’ costs enable your business to achieve its goals, by allowing you to grow capacity, or improve your products or services. These costs will help you grow your revenues, margins and profits, and therefore, you should protect your investment in them.

‘Bad’ costs might be necessary for you to operate, but they won’t drive increased business value or growth. Your aim is to reduce these costs as far as possible.

For this client, the investment in the new unit would allow them to hold more stock, and therefore be able to deliver products quicker, as well as reduce product costs by buying stock in larger quantities.

2) Does the cost represent good value?

It’s always worth benchmarking with other suppliers and getting a number of quotes. However, remember cheaper is not always better if the quality does not meet the required standard.

Speak to the supplier and make sure you’re clear on what you’re getting for the price. Look to negotiate a discount, be it trade or for prompt payment. Alternatively, if cash flow is a battle for your business try and negotiate beneficial credit terms.

For this client, the cost of the new unit was comparable with other local quotes they requested. They had a good relationship with the supplier, and were able to use their payment history to improve their credit terms.

3) Has the expenditure been budgeted and approved?

Firstly, check to see whether the cost was in your budget for the year. If it was then great, you’ve planned for this spend so should have confidence it will help drive your business forward. If the cost exceeds your budget then look across other spend lines, which are less important that you can reduce, and reallocate the budget accordingly.

If you don’t have a budget then make it a priority to set one – we help businesses build annual budgets and five year plans, so contact us today if you need help.

Secondly, ensure the budget owners are aware of the spend and agree with it. Where you have a number of employees who can make purchases, it’s sensible to install a mechanism whereby expenditure over certain levels needs to be approved before a supplier agreement can be made. This approval should involve checking there is sufficient budget to cover the spend.

This client didn’t have capacity in their budget on their storage costs line, but they were able to transfer budget from their travel cost line. They had agreed the cost increase between the owners, who were the only ones who could agree new supplier contracts and make payments.

4) Are your financials up to date?

When reviewing your financials for affordability you need to ensure your bookkeeping is up to date, with transactions correctly coded to appropriate accounts. This allows you to confidently track your expenditure across the various cost lines.

Bookkeeping is the foundation for financial clarity, allowing you to make timely decisions about your business with confidence. We can install a robust bookkeeping process for you using Xero accounting software.

We prepared the bookkeeping for this client, and therefore could quickly log into Xero to check on their financial performance.

5) Is there enough profit and cash in the business?

Once the numbers are up to date we check two things, profits and cash. We want to ensure the business can continue to generate the required profits with the increased costs, and we want to check the cash reserves are sufficient to pay the supplier.

Review your actual performance vs budget, check for areas of overspend and underspend. These are areas to focus on when re-balancing your cost base and budgets.

Look at historic trends, see which costs are spiralling out of control and need urgent attention. Track cost lines as a percentage of sales to help benchmark your cost lines on a relative basis.

Finally, forecast your profits and cashflow with the increased cost. Update your forecast with the latest trends on income and costs to ensure your projections are realistic.

This client was confident in the profitability and cash forecast for their business including the increased storage costs. We checked that it didn’t impact the amount of profits they planned to extract from the business, and that it wouldn’t require any additional cash investment.

Create a business that grows efficiently

Through the review the client decided they could afford the new storage unit. It was recognised as a ‘good’ cost that would increase capacity, at a price that was affordable and able to be covered in their existing budget.

This process sounds like a lot of work, but if your business gets into a regular pattern of reviewing your expenditure, actively reducing ‘bad’ costs and investing in ‘good’ costs that really drive your sales, margins and profits, you will create a habit that allows your business to grow efficiently. 

Get control of your costs by booking a discovery call today.

We help our clients manage their day-to-day finances by setting budgets and plans, keeping their bookkeeping organised, and preparing financial reviews highlighting where action should be taken.