How To Reduce Your Costs & Boost Your Bottom Line.
Cost management may seem like an obvious way of maintaining a healthy business, but it is also one of the primary reasons 80% of small businesses fail. Overspending is a huge problem for most businesses – and they don’t even realize it.
Most importantly, cost management will help keep your business profitable through high and low periods. It’s easy to spend money when your company is doing well, but this leaves little in the “just in case” account for downturns in the economy or unexpected expenses.
Cost cutting is also great short-term strategy to boost profits. It’s an ineffective long-term strategy because there will be a limit to how far you can go. To truly boost profits, you’ll have to manage spending.
This can be a tricky thing to do, because as you market your business, you’ll inevitably be selling more products and services. While you’ll be generating more revenue, you’ll need to remember that each time you sell something it has cost to your business to provide that product or service. When sales go up, so do costs.
There are two types of costs you need to deal with as a business owner: fixed and variable.
There are two types of costs that you have to account for when you’re running numbers on your business.
Fixed costs are essentially the costs you incur in the day-to-day operation of your business. These costs generally stay constant, and can be predicted to a certain degree. This includes your rent, insurance, utilities, staff salaries and your marketing budget. These costs can, of course, change over time, but the bottom line is that they are not affected by sales volume.
Variable costs are those that are impacted by how much you produce and sell. These costs are directly related to your business activity, and include your raw materials and product inventory. These costs vary as much as your sales do. The more you sell, the more raw materials you will need to produce the products you sell.
When you decide to start cutting costs in your business, you need to also undertake a cost management strategy. Here’s how you do it.
- Start by getting an understanding of where your money is going.
If you use a program like QuickBooks to manage your finances, have your bookkeeper run expense reports for the last year. Then, review these in detail to track where your business’s money has gone. What percentage has gone to staff salaries? Wholesale purchases? Computer equipment? Miscellaneous costs and expenses?
Take a close look at how much it has cost you to provide each of your products or services. What offer the highest margins, and which offer the lowest? As we discussed in earlier E-Classes, you want to structure your product lines so that you are selling mainly high margin items. The low margin items are not worth your time.
Question every aspect of your business. Look at every expense, and see how each one adds to the value of your business. Does it make any difference to the bottom line? Are there any other options? Are there better, faster, cheaper ways of doing things?
Write extensive notes in your notepad. Use a highlighter to highlight line items that can be modified or removed. Look for excessive spending patterns, and note which months seem to have the highest expenses.
- When you have a clear idea of what your expenses are, identify areas for cost cutting.
Based on your notes, create a list of what areas or items in your business that could be reduced or cut. For example, if you’re spending a ton of money on staff rewards and professional development, consider less expensive ways to provide the same amenities.
Look in these areas:
- Cost of goods and services
- Employee salaries, bonuses and amenities
- Office supplies (including kitchen expenses)
- Utilities (including phone, internet)
- Printing and production
- Computer equipment
- Office renovations and maintenance
- Create a budget to manage both fixed and variable costs.
Using your tracking sheet, your notes and your own suggestions for reduced spending, work with your accountant and your bookkeeper to create a budget for your business. Establish limits on variable costs, and use averages for your fixed costs based on the previous year.
You may have to work with your budget for a month or two until you get the figures right, but once it is established, stick to it. Share it with your business managers, and make sure everyone is on board with expense limits.
- Establish clear protocols amongst your staff so that spending is tightly managed.
In larger companies where several people have spending authority, it’s very easy for expenses to spiral out of control. As a business owner, you need to review all the money that leaves your business and have a say in those decisions.
Consider implementing spending limits for your managers or sales staff. Or, require specific authorization or sign off on purchases over a set amount.
Review employee expense reports carefully, and be clear with your staff what is “expense-able” and what isn’t. The more you give the impression that the company will cover “everything” the more liberal your staff will be with company money.
- Consistently identify cost management opportunities each time you review your finances.
Revisit your banking and financing packages.
Interest rates can be a big culprit when it comes to eating profits. Take stock of how much money you are spending on a monthly basis in loan and interest payments. Can this be reduced? Is there another bank that will offer you a lower rate? Is there a way to consolidate these loans into a single, low-interest account?
Alternatively, if your business is doing well and has a large amount of money sitting in the bank, consider investing it or placing it in a high interest savings account. Let your money make you money instead of spending it on unnecessary business luxuries.
Continuously monitor the cost of goods and services: your suppliers and vendors.
Make sure the price you pay for goods and services – for resale or internal use – is the lowest you can find. Try to deal directly with the manufacturer or distributer, and renegotiate discounts and contracts with your vendors every year. If you see an unexpected spike in demand, see if your vendor will renegotiate your contract to reflect the increased volume.
Change your hours of operation to maximize existing costs.
Evaluate the hours you are open for business each day, and why you have chosen the specific timeframe. Is it to compete with the competitors? Is it because you can serve the highest number of customers? Each hour you are open for business costs you money, so make sure you are operating under the most ideal timeframe.
If your company operates in shifts, make sure your business operating hours maximize staff schedules. For example, if you’re open for 10 hours, you’ll need at least two staff shifts since the maximum number of hours an employee can work is eight.
Evaluate the structure you have set up for staff wages and compensation.
This can be a sensitive subject for any business owner or employee. It is important to look at staffing redundancies and capacity levels – as well as hiring needs – when evaluating cost management strategies.
Do you need to hire new staff, or can you build capacity within your existing employees? Is there another way to compensate staff, or provide performance incentives that are non-monetary, have a high perceived value, and inexpensive for your business? Remember to take time and care when implementing any changes in this area of cost management.
Lower rent or lease expenses by evaluating your location.
If you operate an office in a downtown metropolis, you are going to have substantially higher operating costs than a competitor who runs an office just outside the city limits. Make sure you can justify your location, and the amount of money you spend to be there. Consider the following questions:
- Are my customers impacted by where I do business?
- Do my customers need to visit my office?
- What impression does my business need to present?
- Do I need parking facilities?
- Do I need to be visible?
- Do I have staff to employ?
- Am I near public transit, lunch outlets, and other amenities?
- Do I need access after business hours?
- Should I lease or buy?
- What other costs are specific to this location?
Ditch amenities that you and your staff don’t notice or care about.
While you want to provide a healthy work environment, there will also inevitably be amenities that go unused or unnoticed. Think about the things that you and your staff can live without. What wouldn’t you notice if it just disappeared one day? Take stock of expenses that are not being properly used or appreciated. Think of amenity-based items, or convenience costs, like:
- Gym Memberships
- Morning refreshments (biscuits, muffins, donuts, etc.)
- Publication Subscriptions
- Designer coffee and tea
- Fancy collateral packaging
Decrease advertising costs or switch to lower cost strategies.
This is a debatable strategy, because in times of low revenue you generally need to advertise the most. However, it may be time to cut back on expensive marketing strategies, and look to grassroots efforts that will give you a better bang for your buck. Keep an extra close eye on your ROI, and quickly ditch risky strategies that cost you money.
Look to lower your utility costs – and help the environment.
Look for ways you can lower the amount of electricity, heat and hot water your business uses. Turn off the lights in unused rooms, and invest in energy efficient equipment that will minimize water and heat waste. There are hundreds of resources – both online and off – for you to tap into. Get creative!
Cost management is an ongoing responsibility for all small business owners and managers.
Unfortunately, cost management typically comes into focus as a strategy only when it’s an absolute necessity. Don’t let that happen to your business.
Stringent cost management is an activity that every successful business owner partakes in on a constant basis. It’s just as important as monitoring your revenues. After all, the difference between the two is what you get to take home at the end of the day.
Small businesses don’t have the luxury of big bank accounts, and generous investors. The only way you’ll realize your truth wealth potential is by carefully monitoring what comes in, and what goes out.