Year-End Planning: Use It to Analyse, Understand and Optimise Costs

With interest rates rising worldwide, year-end planning is an opportune time to optimise business costs. By analysing costs and exploring alternative options, such as renegotiating contracts, consolidating insurance policies, engaging lower-cost energy providers, and considering leasing arrangements, organisations can unlock opportunities for optimisation and growth. This article outlines how businesses can use their year-end planning process to analyse business costs, including areas where adjustments can lead to savings without compromising operational efficiencies or long-term growth.

Review profit and loss and financial statements

Profit and loss and financial statements provide a valuable snapshot of how your business has performed this financial year. Ideally, you’ve been keeping track of performance year-round, understanding what areas drive growth and where efficiencies can be gained. Once you have your profit and loss and financial statements for financial year end, take the time to drill down further into:

• Cash flow: Were there consecutive months of negative cash flow? And if so, why did these occur? Review and forecast your working capital requirements for the year ahead and, if you haven’t already, create a strategy to build up a buffer of working capital to withstand fluctuations in business conditions.
• Growth areas: Look at what parts of the business performed well this financial year and, most importantly, which were profitable. While you may have business areas that drew in significant revenue, they may also be costly to run. It’s essential to make the distinction between commercial outcomes and a cost centre. If part of the business that should be generating profit has become a cost centre, assess why this may be the case and strategise how to change it.
• Ongoing costs: Not only have interest rates increased this financial year, but the rising cost of inputs may also be placing pressure on profitability. Assess your costs line-by-line, identifying what could be eliminated or how you can realise efficiencies without jeopardising long-term growth prospects.

Drill down on and assess your business costs

Once you have a high-level view of your business’s performance in the last financial year, it’s time to drill down further with a cost review. The objective of a cost review is to identify potential areas for efficiency. It’s important to note that while efficiency gains can boost cash flow, making rapid and significant reductions through activities such as mass redundancies, closing down specific locations or selling assets can have the opposite effect. While the company may boost its cash flow in the short term, it may contract too quickly and lose a competitive footprint in the market.

Key activities you may undertake to strategically reduce costs include lower-cost energy providers. It’s estimated that companies who engage a procurement consultancy to renegotiate contracts and consolidate insurance policies could drive savings of between 10 per cent and 35 per cent within the first 12 to 18 months of cost being optimised. For companies who complete this process internally, the cost savings are estimated at 3 per cent to 5 per cent. Ideally, many lease contracts may be centrally stored as part of IFRS 16 compliance systems and processes. However, if this isn’t the case, it also presents an opportune time to centralise all information and data sharing for contracts. And given that 40 per cent of a contract’s value can be lost without close governance, a contract review and consolidation initiative will help you maximise the value of your contracts and possibly uncover features you may or may not need.

For small businesses, making changes to how energy is consumed can provide significant savings (over 50 per cent in some cases) on energy bills through initiatives such as installing solar panels and other energy-saving infrastructure. Specific grants and initiatives to assist with realising energy efficiencies are managed by the state and territory Governments, so check the relevant website to see what may be suitable for your business.

Consider leasing assets to stabilise cash flow

If your company is looking to upgrade assets or free up capital, leasing is an alternative that can deliver a range of strategic, financial and operational benefits. For example, if you have laptops and other devices or workshop equipment that aren’t running at peak efficiency, you can lease the new assets to get the best technology available without sacrificing working capital. Further, with more efficient technology in operation, the revenue generated using the leased assets can cover some of the ongoing lease payments. At the end of the lease agreement, the right asset finance provider should have a responsible e-waste and end-of-lifecycle process that reduces the risk of your assets ending up in a landfill or causing reputational and financial damage if assets aren’t effectively decommissioned, exposing sensitive data to the wrong people.

In a high-interest-rate environment, leasing also provides financial stability. The interest rate is fixed for the lease agreement term, so repayments remain stable. This provides another way for companies to better manage capital in an inflationary environment. And through options such as Quadrent’s Green Lease, which sustainably e-wastes and decommissions devices and gives suitable assets a useful second, companies can enjoy a discounted interest rate too.

Strategically manage financial year-end with Quadrent

Financial year end is an important time to review your business’s performance to determine where improvements can be made. By methodically reviewing business costs and strategically making changes to current and future contracts, whether for insurance, business premises or technology assets, working capital and cash flow can be better protected, which is critical in an inflationary environment. And by opting to lease assets through a sustainable provider, businesses can proactively address their ESG risk too.

Quadrent works with organisations helping them access assets without sacrificing cash flow and addressing their ESG risk in the process. With a team that has in-depth leasing knowledge and specialised accounting backgrounds, we’ll help your business weather tough economic conditions, get the most value out of your assets and address growing ESG requirements and reporting expectations. 

Proactively manage your cash flow in a challenging economic environment with Quadrent. Click here for more information. 

This article is for general information purposes only. Consult a qualified financial professional to get advice that is specific to your business’s circumstances.