How do running costs or operational expenses and cash flow relate?
After you have tried your best to improve sales growth, cut costs while maintaining quality and competition, reworked your distribution channel strategy to expand your market while maintaining a steady gross margin, the next step is to concentrate on operating expenses.
After sales growth and gross margins, the next crucial cash driver is selling general and administrative expenses (SG&A).
Also called corporate overheads, selling, general and administrative expenses may be known by different names in different companies. SG&A is mainly the cost of doing business comprising of operational costs. The quest is always on to reduce these expenses and increase cash flow by improving internal processes, shorten delivery time to customers and minimize finished goods inventory.
In most service-oriented businesses, most of the costs are in SG&A. In manufacturing or merchandising businesses, costs comprise mainly of the cost of goods sold. However, SG&A is still prominent and all corporate overheads like staff and functions, rentals, resources etc. are included in it. Operating expenses also relate to the product or service and include employee wages, commission payments, salaries, bonus payments, utility bills, lease payments, operational taxes, travel and entertainment, insurance payments and supplies. However, expenses associated with investment, financing and taxes do not come under SG&A since these are not daily routine expenses and do not figure in delivering the product or service to customer.
Whether SG&A is viewed in terms of dollars or percentages, one thing is for sure: costs can go up quickly. It is bringing them down that is the challenge. A growing organization costs more in cash. If the organization is not doing well, cash cuts are usually unplanned and hasty. Thus, to run a business successfully, it is important to prepare for expenses and plan a strategy that can help to counter its effects. Every employee must be aware of his or her contribution to the business and their role in its success, along with an awareness of the resources required to make them more efficient and effective. This kind of preparation helps. Unless costs help to improve quality, capacity and responsiveness, they must not be encouraged.
SG&A From The Point Of View Of Capacity
SG&A has a close relationship with capacity. This is better understood by pondering on the connection between resources and revenue growth in a company. Suppose you want to increase sales growth by 10 or 25% what extra resources would be needed? Would this sales growth affect any resources severely, and how? This could be to do with space, staff, inadequate parking facilities, and other resources. In case sales volume went down, and costs had to be cut by say 5 or 15%, what resources would have to be sacrificed without feeling the pinch? By answering these questions, you can get an idea of the likely causes and also know which capacity-enhancing resources can be purchased in bulk.
On the income statement, next to revenue, it is SG&A that figures prominently. In most cases, SG&A is perhaps the most controllable or flexible cost group and must therefore be considered very carefully by the senior management while planning their long term business strategies since SG&A is a basic cash driver in any type of business.
Thus, after SG&A and gross margins, which are basic cash drivers, next come the swing factors or the account receivables, accounts payable and inventory. These may not be basic, but nevertheless need to be carefully monitored, as they can determine a business’s success or failure. They can literally swing a business from failure to success and vice versa, regardless of how strong or well managed your basic cash drivers are.