Every business needs profits to fuel growth. Forget growth for a moment, you need to earn enough cash to cover at least your costs to survive. So profitability of a business is considered a high priority issue for which sufficient attention should be provided by the management.
Retained profits can be very handy for a business as it could be used for 2 highly important things. One is to satisfy the future business needs mainly in the form of expansion expenditure. The other important aspect is to face emergencies caused by unexpected events for which prior planning is impossible. In both cases availability of retained profits releases the burden of the management by providing the opportunity to meet at least part of the financial requirement.
In order to retain profits first you need to generate it. This could be done simply by either increasing the revenues or reducing the costs. Out of these two, cutting on costs is generally much easier than increasing income. So during the rest of this article let us look at some of the ways and means by which a business can save money for the future.
Negotiate your deals
Within the course of your business you need to procure many goods and services. By negotiating with the other party you may often get the opportunity to purchase at a discount. This will help you save millions in the long run. However negotiations work only when both parties benefit from it. So you can pay early in exchange for the discount mainly if you are paying in cash or if you intend to pay within 5-10 days. Apart from the opportunity to save money, these negotiations will also allow you to build a strong credit record that your business can surely benefit from.
Reduce wastage
You can earn a fortune if you initiate those small steps that are needed to reduce wastage at your business premises. For instance you may shut down your computer monitor when you go away from work. Similarly you can switch off lights, air conditioners etc whenever you do not use them. Further you can use auto-setback thermostats and automatic light switches to conserve energy at low cost.
Use lease agreements
One of the best methods to protect your cash is leasing the capital goods rather than purchasing it outright. Provided the interest rate is not exorbitant, a lease agreement is quite useful because it allows the business to save cash to be used especially in an emergency. Further it reduces the risk of your capital goods being obsolete or out dated as these agreements can be renewed if you intend to purchase latest equipment.
Last but not the least, spend only when necessary
Many businesses want to be grand and big. While it is perfectly all right to be so, you need to be in a position to afford it as well. It is always less risky to start things small and expand in steps rather than initiating it on huge scale.
For example it would be more prudent to forego the planned television advertisement campaign and focus on news papers if you are just starting your business. The news papers are handy enough to get your name out there and hopefully as you establish yourself with a strong financial background, it would be wise to move on to television.
Conclusion
As we discussed above no business can underestimate the importance of cash. In fact, one of the primary reasons for high business failure rate is cash flow problems where expenses outpace revenues. Present day expenditures cannot be offset against future returns in cash terms although you do it in the profit and loss account to arrive at a profit.
So at the end of the day you may have profits but still you might have to liquidate if you do not manage your cash flows properly. So it is advisable that you control your costs and save for the future because, then you are anyway safe.
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