Minimise your costs
Whilst the precise details of how a business can minimise its costs varies enormously according to the type of freelancing work that you do. There are nevertheless a number of techniques which can be used to good effect by all freelancers.
All freelancers should prepare comprehensive and up-to-date budgets and continuously monitor their actual performance against those budgets. Variations from budgets should be investigated and the reasons for them fully understood, with corrective action being taken promptly where necessary.
A properly designed budgeting process can, in itself, help to reduce your costs if every item to be included in the budget has to initially be justified from first principles. The alternative and wrong, way to set your budgets are to include everything at last year's level plus inflation, on the basis that "if I spent it last year I must spend it this year".
The ‘first principle’ of budgeting involves answering the following questions about every single element of your costs:
- Can it be eliminated without significantly damaging the business's profitability?
- Is it over-specified for the needs of the business, and could the specification be trimmed to save costs i.e. are we using a Rolls Royce when a Mini Metro will do?
- Does it cost more than the benefit it delivers?
- Can the same outcome be achieved more cheaply in some other way, perhaps by changing company procedures or by installing a new computer?
- Can it be done more cheaply by an outside sub-freelancer?
- Can it be done less frequently without harming the business?
- How do other businesses achieve the same outcome?
- If you were to start in business again would you still decide to incur this type of cost?
- Is there any duplication of effort or can the task be combined into one that is already carried out elsewhere in the business?
- Is somebody responsible for the cost and how do they go about discharging that responsibility?
- When was the last time competitive price quotes were obtained? Has the choice of supplier become a matter of habit and convenience rather than sound economic sense?
Whilst such questions should be asked of all costs, it clearly makes the most sense to initially concentrate on the largest elements of costs, since they are likely to have the greatest potential for reductions.
When combined with sales forecasts, these cost budgets should also enable you to forecast your cashflows to identify whether you are likely to need an overdraft facility. They will also show you when and how much you may need to borrow, and this will help you to negotiate the necessary facility with your bankers well in advance of the event. Not only does this budgeting discipline enable more effective business control, it also creates a very good impression with your bank manager. This can then lead to more leniency should you request an overdraft.
In principle, budgeting and forecasting are fairly straightforward. However, you can, of course, ask for assistance from an experienced accountant. They will be able to use both expertise and sophisticated computer technology to enable your forecasts to be accurately and speedily produced in response to changes in circumstances at the ‘push of a button’.
To get the very most out of every pound you spend you should:
- Select your proposed purchases after careful research, it can be very expensive to buy the wrong thing. Make full use of independent brokers and advisers if they are available on a no-fee basis (as in the case of insurance brokers and independent financial advisers).
- Select a supplier for your chosen purchase based on a pre-prepared list of criteria such as price, availability, location, delivery time, credit terms, training, after-sales support and guarantees. If one supplier is ahead of the field in all areas other than price, then point out their price disadvantage and ask them to reconsider their price, since you would very much like to buy from them if only they were a little less expensive. This disarmingly simple tactic has stood the test of time, as a method of worrying the seller into believing that a genuine and immediate sale will be lost unless he accommodates the request.
- It is also a good idea to save one element of your required package to the end of the negotiations and then slip it in almost as an afterthought, for example, “Oh yes, I nearly forgot, we do insist on receiving 60 days credit" or "we do take a 2% early settlement discount, I assume that will not be a problem?". Many salesmen, fearful of the lost sale and the associated waste of their time, will not argue the point. They will prefer to attempt to justify their generosity, to the accounts department on their return to the office.
Other ways to cut the cost of being in business include:
- Offering prompt payment/cash in advance in exchange for a discount.
- Ensuring that all quantity discounts due to your business are received.
- Discussing with suppliers methods of reducing unit costs. Many suppliers will offer discounts if you order in a batch size that is economic for them or accepts delivery on a day that is convenient for them.
- Wherever possible obtain samples or items on approval to enable you to fully evaluate their suitability. Also try to negotiate ‘sale or return’ arrangements, even if they are not standard practice in your industry.
- To avoid subsequent confusion, disagreement and unnecessary expense, confirm all orders in writing, stating clearly the product details, price, credit terms, delivery method and time.
Physically check the quality and quantity of items delivered. Sign any delivery documentation with the words ‘received unchecked’. Especially, if you are not able to fully satisfy yourself of their suitability at the time of receipt.
On receipt of the invoice, it is important to fully check its contents since, even in the age of computer invoicing, it is surprising how many errors, usually in the supplier's favour, they contain. Therefore you should:
- Check the quantities invoiced match those received.
- Check the price charged matches the price at which you ordered them.
- Check that no unexpected extras have been added to the invoice for postage and packing etc.
- Check the arithmetical accuracy of the invoice, including the VAT, if any.
- Refuse to accept any invoice which includes VAT but does not quote the supplier's own VAT number.
- Send the invoice straight back if it is wrong.
Do not settle your account until the agreed credit period has expired and you are fully satisfied that the supplier has met his side of the contract. In fact, it is now common business practice to consider taking further credit. Especially if there remains some small element of dissatisfaction, such as an invoicing error.
However, it is important to recognise that HMRC must be paid promptly since they can and will impose legally binding charges and penalties for late payment.
More running your business.