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What is and how to do Cash Flow?
In this article we will talk about:
- Why is cost reduction so important?
- How to reduce costs in practice
- Two examples of cost reduction for LUZ
- Do even reduce costs with your cash flow
It is quite common for me to see managers and entrepreneurs neglecting to control costs at times when their companies are well, after all, if there is money left over at the end of the month, the impression is that everything is all right. The problem is that often not caring about this cost reduction, we are leaving our companies or areas vulnerable to crises or problems that we did not expect.
I am speaking from experience of a troubled moment that we live here in the LIGHT this year (and that I will speak later in this article).
For you to have a quick idea, by keeping your company lean and cost-cutting, you can contribute to an increase in your bottom line (which can lead to greater profit distribution), the better contribution margin (which can ensure continuity of certain products or services) and also of profitability (which shows if your company can generate profit from the revenues it had). That is, they are only benefits, so there is no reason to keep costs high when you can work to have better control.
Cool, but you must be wondering how to cut costs, after all, maybe you've already done everything and see no other possibility. Here in LUZ we have 3 ways of doing this analysis within the structure of a spreadsheet cash flow who usually help us a lot:
- Analyze your Chart of Accounts
- Make specific reviews on your DRE
- View Expense Charts
Let's take a look at each of these methods:
1. Analyze your Chart of Accounts
For anyone who has not heard of it, chart of accounts is the separation of your income and expenses into specific groups. And if you know you have accounts that are not more important than others, it's worth investigating each one of them to understand where there is a possibility of cost reduction.
In the example below, we have a chart of accounts on two levels. First the general accounts (expenses with products, with HR, operational and marketing) and, at a level below, the detail of these groups.
The key tip here is to try to understand how much you have to cost for each of these large groups and then put goals to reduce those values by analyzing the level of specificity. This work can be helped by our next point.
2. Make specific analyzes of your DRE
To make specific analyzes, it is worth taking a look at your statement of income (DRE). In a quick way it is possible to find high cost points and work upon them. In our example below, doing a quick reading we already see in the profit / loss line that the month of May has a loss outside the curve (very high). If we look in more detail this month, we will see that we have R $ 5.300 of indirect expenses, which is a very high value compared to other months.
With this in mind, it is worth going into the specification of overhead. At spreadsheet cash flow these data are easily found in the DRE report. See below that we just look at the month of May that we will perceive that the "big villain" was the increase of wages.
From these data, it is already possible to plan a cost reduction, be it with outsourced labor, staff or bonuses / commissions given to your team.
3. Expense Graph View
To close, a great ally of cost reduction are the visual analyzes. Where you can quickly understand what kind of cost is greater and why. Usually to make this type of evaluation it is important that your spreadsheet cash flow give you ready and specific graphics, like the one shown below:
With it you get a quick view if there is any group of the expense account plan that is most relevant. In our case, the expenses are well balanced with a higher percentage for expenses with products and marketing expenses. These could be the starting points in a cost reduction study of your company.
Now that we've talked about hypothetical cases, it's worth taking a look at two examples that happened in LIGHT throughout this year and which we like to talk about, to help managers like you not make the same mistakes:
Case 1 - increase in one-off expenses from one month to another
Our first example was an exacerbated spending increase with a single item being poorly controlled. Just to contextualize you with the reality of LUZ, we use several ways of advertising online and one of them is google adwords (Google ads platform).
Throughout the year we were keeping our average spend at $ 15.000 per month with this platform, but as I said, in a disorganized way. Since some of the budgets you use are automated, we are extrapolating these costs by more than R $ 35.000 in a single month (April). See more or less how our cash flow stayed:
Despite the FC were hypothetical, the visual analysis was just that, a spending spike in a single month. At first we did not know that the cost had been of that specific campaign and that was where an in-depth analysis helped.
See the percent of cost chart for that particular month:
It's easy to understand that the mistake was in marketing and then we received the unpleasant surprise of invoicing that account. The positive point is that from this mistake, we managed to restructure the control of our online marketing campaigns and until today we had no problem any more, always keeping these costs controlled and below what we stipulate to spend.
Case 2 - Gradual team reduction
Another problem that many companies go through is that of very large teams generating heavy expenditures. In our case, we never had an extremely large team, but at some point in the year, when we had a reduction in revenues, we stopped to analyze our expenditure table and it was this scenario that we saw:
Around 72% of our costs were personnel expenses, whether salary, prolaborate or benefits. As we were going through complicated times and cost reduction was a necessity, we ended up leaving the comfort zone and making the decision to lay off a small part of the team.
While these decisions are never very cool (because we have created affective ties with the team that LUZ has formed), we have been able to reduce our HR costs by 5% from one month to the next.
But this was still not enough and the next month we made another resignation, this time a little more drastic, driving people to the level of only 46% of HR spending. Although this is still our biggest expense comparatively, we managed to dry up the company's costs a lot.
One cool thing about this process was realizing that even with a reduction of the team we managed to keep the company fully operational, that is, we were not working to our full potential when we had an "excess" of members in LUZ.
If you want to know more about Cost Reduction, watch the video below:
And have you done any analysis and cost control work? If you have not done so, you are probably leaving your company susceptible to problems at inopportune times. So I recommend that you use your cash flow to analyze where you can cut expenses. If you do not have a tool, I recommend that you spreadsheet cash flow, which is already ready and allows you to do all the analysis I showed here in the post.