This article was written by Simon Barker, Bartercard UK CEO. Bartercard is the world’s largest business-to-business trade exchange servicing over 75,000 trading members across six countries.
There’s never a time when a business shouldn’t seek value for money, but when economic conditions are uncertain and consumer confidence is low, it’s more important than ever. Many SMEs are finding sources of working capital difficult to access and need to search for innovative ways of managing their cash flow.
While it doesn’t take a team of expert strategists to realise how important it is for SMEs to stay within their means, the solution isn’t as simple as deciding to spend less.
Instead, businesses need to think very carefully about where they can make savings. During this process, they can identify areas where they can’t make savings – either because they already get good value for money or because their spending delivers sufficient return on investment that to reduce it would damage the profitability of the business.
Unfortunately, merely completing this process doesn’t create a route map for success. Instead, it might just identify that a company’s outgoings are too great, even if it makes savings where possible.
It’s in these circumstances in particular when there’s a strong business case for finding other ways to pay for goods and services, such as bartering.
Cash flow management
The important first step for SMEs aiming to preserve cash is to draw up a budget. There are many different ways to do this, but the aim is always to identify where your business is overspending, or where it should be spending more.
After this process, companies can begin planning their route to where they realistically hope to be over the next year.
The main cash management goals will be to increase and accelerate the money coming in and decrease and slow down the amount leaving the business.
This often means carrying out an action and its counterpoint. For instance, increasing the speed of cash in by reducing the trade terms you offer debtors and slowing down the speed money goes out by asking for longer terms from your creditors.
You can also increase the speed money comes in by billing promptly and asking for deposits and decrease it by securing lower monthly repayments on long-term debts and reducing your inventory.
While the principles of cash flow management are straightforward, the way business owners achieve these in practice can still be a minefield. In terms of making savings, for instance, return on investment is crucial.
A classic mistake during uncertain economic times is to slash advertising budgets, costing the business more in lost sales than is saved through the reduction in ad spend.
Likewise, if your company has invested a lot in CSR initiatives, it’s unlikely the amount saved through cutting these would be greater than the losses resulting from the damage caused to your brand.
Preserving cash resources
It’s when savings can’t be made that bartering is a particularly attractive option for SMEs. Bartering allows businesses to maintain cash resources by paying with goods or services. In the case of a business-to-business trade exchange, this means owing goods or services to other members of the trading network.
For instance, if a barbershop needs accountancy work carried out, it could pay an accountant who is also a member of the trade exchange in trade pounds. If the accountant charges £600 for the work carried out, the barber owes haircuts to that value within the network, while the accountant can spend that amount with other members.
The benefit of a trade exchange over the earliest forms of bartering is that the two parties don’t need to require each other’s services for a deal to take place. For instance, £600 is a lot of haircuts, and may not appeal to the accoutant. By allowing the accountant to spend trade pounds with any other member, the trade exchange means he can pay for anything from advertising and stationery to hotel stays and meals out.
For the barber, if business had been slow and the only other way to pay an accountant would have been to cut other important spending, such as advertising, the benefits of bartering are immediately apparent.
However, even if the barber could afford to pay for an accountant and advertiser in cash, there could still be a strong case for bartering.
For instance, if most of the barber’s clients book appointments in the morning or evening, then there might be a period during the afternoon when the barber isn’t cutting hair, because no one has booked an appointment.
If trade exchange members were booked in for haircuts during these slower periods of the day, the barber could still offer haircuts to the same number of cash-paying customers while covering the cost of the accountancy work that would have otherwise required a cash outlay.
Likewise, a hotel that is busy in the summer but normally has a number of unoccupied rooms in the winter could cover the cost of its advertising or even it’s fire safety equipment by offering spare rooms during quiet periods to other trade exchange members.
While difficult economic circumstances can force businesses to find ways to preserve cash, there’s always a firm business case for looking at how to manage cash flow and boost profitability.