There are some small business owners I’ve spoken with recently who are doing it tough. For them the current business environment means that it’s increasingly difficult to rely on earnings growth alone to improve profitability. Consequently, cutting costs has become a necessary way to boost the bottom line. But to do this you need to first identify what your major costs are.
By going to your profit and loss statement, for the last twelve months and ranking all your expenses from highest to lowest, you can see if and where you can save costs that will result in the greatest benefit to your business. From this list you will get a clear picture of where your money goes. Once you’ve singled out the most costly items, the next thing to do is record your actual costs and compare them with the amount allocated in your budget. A spreadsheet is an easy way to record and compare costs on a regular basis. Actual costs that are higher than your budgeted costs usually mean there’s an opportunity for a reduction. Lower costs might indicate good management, but it might also be masking a drop in quality or other problems that should be investigated. Try to work out why there are discrepancies between actual and budgeted spend.
Wages and other employee expenses are often the biggest single cost. A major saving will result if you can reduce this by outsourcing work, or employing on a part-time rather than full-time basis. Along with employee expenses, one of the other top ranked items will be rent. Try and renegotiate a rent reduction. If you’re in an area with high office vacancies ask for a better rate or consider moving. Also try getting the most out of your premises by sub-letting spare space if that’s possible.
If your costs are higher than budgeted, then there are many operating costs that can be reduced with little risk of an adverse impact on quality and performance. These include:
• Carefully checking supplier invoices for overcharging.
• Not accepting a price increase without challenging it. Obtain alternative quotes and advise your suppliers that you’re looking elsewhere, but give them a chance to reduce, or not raise, their prices first.
• Agree to long-term supply contracts or annual purchase volumes in return for lower prices and negotiate longer payment terms.
• Check that products being used do not exceed their requirements such as the most expensive printer ink on the market or paying for unnecessarily large amounts of internet data.
• Don’t leave all your business banking in the hands of one institution. It can pay to shop around. Many banks specialise in different areas and you can use their knowledge to serve your needs, and save money.
• Shop around for the best deals on telecommunications. Mobile phones might be better than landlines, or consider rates on phone and internet packages or even using phone systems like VoIP. Use email and internet calls (such as Skype) whenever possible to avoid travelling to meetings.
• Reduce travel expenses by avoiding last minute bookings for flights and accommodation and consider using trains or buses instead of taxis.
• Software is moving to the cloud and to a subscription model, so instead of buying software you can now pay a monthly subscription and always get the latest upgrades. This reduces cost, generates tax deductions and improves cash flow.
• Measure the return on all your marketing activities and eliminate what doesn’t work.
• Avoid frequent small orders from suppliers. They waste time and mean you miss out on bulk discounts.
• Recruitment can become more targeted using social media and other networks. You don’t get hundreds of job applications and then have to pay recruitment commissions.
• Eliminating any other inefficiency. Identify manual or paper-based systems that could be automated or digitised.
• Other costs such as long-term fixed rate business loans or fixed price contracts for raw materials are hard to control in the short term. So make a note of when these are up for renewal and plan to tender out to suppliers when the time comes.
Despite the benefits to the bottom line, reducing costs can have a negative impact on your business. Before you make any changes, check that your standards will not be compromised and be aware of any potential risk to your core business activities. Tighter control of financing may also leave you with no safety margin when cash flow is unexpectedly poor. But taking a systematic approach to reducing your costs should highlight other opportunities for cost control. In many cases, reducing costs will require you to change the way you do things but this will be well worth it in the long run.