How to cut business costs
Posted on 14th Apr 2022
How can I reduce my business costs and increase my profits?
It may seem a bit obvious to say but for a business to make more profit it must either increase its sales revenue sales or reduce its costs.
The place where most business owners tend to start when it comes to increasing profits is to reduce business costs.
In many ways, this is a very sensible starting point because, as a business owner, you have a certain amount of control as to what the business spends its’ money on. If you decide to stop spending money on, say an IT software subscription, then you can. It’s your choice.
The question is what business costs should be reduced and what is the best way of doing it.
WHAT ARE BUSINESS COSTS WHICH I COULD REDUCE?
Before deciding which costs to reduce it’s important to clarify the four main types of costs that every business has. These are:-
1 Cost of producing a product or delivering a service
These are costs that are directly linked to a sale. Just for a business to make a product or deliver a service to a customer, it must incur a cost.
Some examples of which are:-
- For a manufacturer that means the raw materials & cost of the manufacturing staff
- For a print company that means the cost of the paper, ink & cost of printing staff
- For a web design company that means the cost of web hosting fees & cost of web build staff
- For a shop that means the stock on the shelves
Without changing your product or service these are costs which are typically difficult to significantly reduce without adversely affecting sales revenue.
2 Business running costs
These are the day-to-day business running costs which aren’t directly linked to a sale.
These typically include:-
- Premises costs: rent, rates, utilities, repairs, etc
- Marketing costs.: pay per click, Facebook ads, flyers, etc
- Staff costs: staff wages, sub-contractor cost, etc
- Office costs: stationery, insurance, accountancy, IT, telephone, etc.
- Finance costs: bank charges, loan interest, etc
Whilst none of these are linked directly to a sale most are still needed, to some degree, if a business is to function. Without them it simply won’t be able obtain or retain customers. For instance, a telephone is needed to communicate with customers.
3 Tax costs
Every business which makes a profit will have to pay tax. Corporation tax is paid by a limited company. Income tax & national insurance is paid a sole trade or partnership.
The bottom line is that the tax is another cost which reduces the bank balance.
4 Your income
You’re the most important cost of the business because without you the business either won’t exist or is unlikely to flourish. At the end of the day, you have to be paid as you have a bills and a personal lifestyle which have to be paid for.
HOW CAN I REDUCE MY BUSINESS COSTS?
Fundamentally there are three main ways for an owner to reduce the costs of their business AND, in doing so, without adversely affecting the customers and sales income.
- CUT WASTE – for instance, stop IT software subscriptions that no one uses anymore
- INCREASE EFFICIENCY – for instance by improving a manufacturing process meaning fewer raw materials are bought and/or less staff time (& cost) is needed.
- PAY LESS – but ONLY as long as the quality is not compromised and stays unchanged
Some possible ideas to reduce your business costs include:-
- Review bank and credit card statements
Every 3 months someone should review each line on the business bank and credit card statements.
Firstly, ensure you know what each cost is for – any that aren’t recognised could potentially be cut. Secondly, consider if there is anything (especially look at IT software and subscriptions) that might not be still needed. Anything which isn’t needed anymore can be stopped and money saved.
- Have processes
Having processes and procedures which clearly set out how tasks in a business are done, as a rule, reduces errors and increases efficiency. It sets out what is the best way a task should be done.
Having processes and procedures in place which everyone in the business follows reduces chaos and confusion, reduces waste and reduces errors being made.
The result, is that over time efficiency increases and costs fall.
- Find a better way – use technology
Many businesses processes are still manual – these tend to be both inefficient and costly.
In many cases, a business can use technology to make those processes less manual and therefore more efficient. At times technology can be used to completely automate and replace what used to be a manual process.
Increasing automation ultimately saves a business cost.
- Review your return on your marketing
Many businesses spend a sizeable amount on marketing each month BUT don’t have a clear understanding of what return they are getting back in terms of new customers and increased sales revenue.
By understanding what the return is for each marketing pillar (eg Pay per click, Facebook Ads, Flyers, etc) allows a business owner to assess what part of the marketing is working and what isn’t.
Any marketing which is performing poorly can either be stopped (which saves cost) or its cost re-allocated to marketing that is performing much better (which increases sales revenue).
- Make sure you are tax-efficient
Tax is a business cost. A good accountant will make sure you claim all the tax reliefs you’re entitled to and ensure you are tax efficient.
- Anything else
Insurance – review the insurance once a year to make sure you are not paying more than you need to simply because you’re over-insured or paying twice for the same cover.
Paying off debt – to save interest costs it is best to repay first any debt on which you pay high rates of interest.
Go paperless – use technology to save and send documents electronically as this reduces postage and stationery costs.
AND WHAT TO AVOID IF AT ALL POSSIBLE….
Drastic cost-cutting should be avoided if at all possible but it tends to happen when there’s a cash crisis and there’s an immediate need to save cash.
When this happens any costs which can be cut straightaway are – in some cases completely.
The trouble with this approach is that drastic cost-cutting is hard to do without adversely affecting sales revenue.
This is why.
The truth of it is that it’s harder than you might think to drastically, and quickly, reduce the costs of a business. Some costs, such as rent for premises, might be under contract whilst others, such as telephone, are needed just for a business to function.
Usually, the costs that get cut are training and marketing – which tend to be the ones ‘left’.
Cutting marketing spend will save a business cash in the short term.
A lower marketing spend will adversely affect the ability of a business to get and keep customers. That in turn results in falling customer numbers which ultimately leads to lower sales revenue and lower profits in the future.
FINAL THOUGHT: CAN YOU RELY ON COST-CUTTING ALONE?
To expect that costs can be driven down and down to zero (or a really low number) I’m afraid for almost all businesses is unrealistic.
That’s because, as mentioned previously, for a business, to function it needs to have some services (even if it’s just a telephone or computer to communicate with prospects and customers)….and that means the business will have some cost.
Even if it were possible, it would be again unrealistic to expect that the business would also be highly profitable.
The reason is that to minimise cost the business owner is being forced into doing everything themself. By not having any outside help is likely to limit the sales and profits of the business.
IF a modest income is NOT what you want long term then you can’t just rely on a low-cost strategy to get your profit where you want it to be.
That means you need to consider ways to increase your sales revenue to generate the profit you want…..
If you’d like some help when it comes to reducing your business costs and increasing your profits then give us a call on 0161 410 0020 or drop us an email at firstname.lastname@example.org