Cutting back for success

For many business owners cutting costs is an activity reserved for tough times when profits are down and cash flows are tight.  The need to be frugal is often forgotten when the business is performing well.

Cutting back on costs in more prosperous times can, however, significantly improve the success of your business.  Undertaking a regular review of your business’ costs is arguably the quickest and easiest way to improve profitability and ensure that you remain competitive in the longer term.

Furthermore, ensuring that operations are streamlined now, will put you in a better position to weather potential future hardship.

For many small business owners, knowing where to reduce costs without affecting the operations of the business can be a challenge. Often, we see management play around at the edges and cut costs such as entertainment.  This type of strategy is unlikely to have any significant impact on total costs or overall results.

Instead the focus should be on the major costs  of your business.   We’ve identified some of the most common areas in which businesses can apply cost-saving tactics and gain the most reward.

Direct Costs

For most businesses this is the first place to start and will have the biggest impact.

  • Purchase prices – Consider whether you can renegotiate purchase prices for your product from your suppliers.  In order to lock in the relationship they may be happy to provide you with a better deal.
  • Settlement discounts – If your cash flow is strong, you may be able to negotiate discounts on early settlement with your suppliers.
  • Foreign exchange – If you are buying from overseas, explore whether you can lock in forward exchange contracts to protect your costs from increasing due to foreign exchange movements.
  • Freight & transport – Consider whether you can renegotiate contracts for importing or exporting your goods.

Labour costs

While there is potential for significant cost savings in this area, any such action should form part of your overall strategy rather than just a cost saving exercise.

  • Retain key staff – Work hard to keep your key people to avoid having to pay a recruitment fee to replace an employee who has left.
  • Counsel out nonperforming staff – Whether times are tough or your business is strong, you cannot afford to carry staff who are not performing to your expectations.  Ensure that the process is considered and in accordance with the industrial relations laws.
  • Overtime – Ensure that there are no unnecessary overtime costs.  Review unusual timesheets.
  • Outsource – Are there roles that you could outsource cheaper than having a permanent staff member perform?

Indirect costs

Start by reviewing your detailed profit and loss statement for the last six to 12 months, to identify areas here you could save costs.  Some of the costs to consider could include:

  • Financing – Review your financing situation.  Many companies are running a long term overdraft that is secured by personal property.  If this is the case, explore with your bank whether you can move to medium or longer-term debt with the same level of security, but at a lower interest rate.
  • Accounting  – Review how you perform the finance related tasks of the business including payroll and accounting and what level staff you are using to perform this work.  Are there costs that you currently perform in house that you could outsource at a lower cost?    Ensure that the process is considered and that the business has the correct level of support moving forward.
  • Discretionary spend – Ensure that you have processes in place for controlling discretionary spending.  Entertainment and travel expenses must be effective and well targeted.
  • Communication and utilities – Review your current contracts.  How long has it been since you reviewed all of your arrangements?  Typically a business will receive a competitive offer at the start of a contract, and over time the competitiveness of the offer will diminish.  Can you take advantage of a new promotion or package, or negotiate better terms?
  • Marketing – While a cut in marketing spend is not recommended, make sure you are getting the best out of the marketing dollar and advertising rates.  Review marketing activities to ensure spending is well targeted.

As part of your cost cutting review, you should also consider benchmarking your business against others in your industry. Monitoring your business’ costs in line with identified benchmarks will help you to identify risk areas, act quickly and make the necessary changes to ensure your continued success.

With a small shift in thinking, cutting costs can become a driver of business growth rather than a last resort.