What costs look too high in my business and I should look to reduce?
It’s an important question because most businesses don’t struggle because of one huge financial mistake. More often, profitability is eroded by dozens of smaller costs that gradually increase over time without attracting much attention. It is like having a bucket with lots of tiny holes in the bottom.
As businesses grow, expenses naturally grow with them. New team members are hired, software subscriptions are added, vehicles are purchased, office costs increase and suppliers put their prices up. The danger is that many of these costs become accepted as “normal” and are rarely challenged.
The result is that turnover can increase significantly while profit and cash in the bank remain disappointingly flat.
The key to good cost control is to know which costs are essential to delivering your service and helping your business grow, and which costs don’t.
The impact of high costs on a business
When costs become too high, the effects spread much further than simply reducing profit.
Lower profits mean there is less cash available, which has three important implications.
- Less cash to re-invest in the business – more marketing to increase sales, recruit great people and improve systems.
- Less cash to pay yourself.
- No cash reserves meaning the business is vulnerable when sales dip.
For the business owner, excessive costs often create a feeling of running harder and harder without seeing the financial rewards. Many entrepreneurs find themselves working longer hours, carrying more responsibility and taking more risk while their personal income remains largely unchanged.
The challenge is that not all costs should be reduced.
Some expenses generate significant returns and help the business grow. Others provide little value and just consume profit every month.
The goal isn’t to slash costs across the board.
It’s to remove waste and inefficiency while continuing to invest in the areas that help the business grow.
Here are four areas worth reviewing...
Review staff costs as a percentage of sales
For many businesses, wages represent the largest overhead and therefore the biggest opportunity to improve profitability.
This doesn’t automatically mean reducing headcount. More often, it means ensuring that team productivity, efficiency and sales generation are increasing at least as quickly as payroll costs.
How to implement it…
Calculate total payroll costs, including employers’ National Insurance, employer’s pension contributions, bonuses and benefits, as a percentage of sales each month.
Then ask yourself:
• Has this percentage increased over the last 12 months?
• Is every member of the team achieving their targets?
• Are managers / supervisors spending too much time on low-value activities?
• Could technology or automation improve productivity?
• Is it possible to change shifts/opening times to more closely match staff availability with customer demand?
In many businesses, improving productivity by just a few percentage points can generate significantly more profit than making additional sales.
Eliminate software and subscription creep
Most growing businesses accumulate software subscriptions in exactly the same way households accumulate streaming services.
A new system is purchased to solve a problem, another is added six months later and before long the business is paying for multiple tools that perform similar functions.
How to implement it…
Review all bank and credit card statements so you can see every monthly subscription, software licence and recurring direct debit.
Pay particular attention to:
• Unused software licences.
• Duplicate systems.
• Premium features nobody uses any more.
• Legacy systems that should have been replaced.
• Automatic renewals that just roll on year after year.
Many business owners are surprised to discover they are spending thousands of pounds every year on subscriptions that deliver little or no value…but can be easily cut.
Review return on marketing spend
Marketing should always be judged by results. Specifically, how many leads and customers does each marketing activity generate?
All too often, business owners don’t have the information they need to know.
That’s for two reasons.
1. The marketing spend isn’t split out by using a different account code in the accounting system for each marketing pillar or channel.
2. The sources of leads are never tracked or recorded.
A common mistake is continuing to invest in marketing activities because they have always been done rather than because they are producing profitable customers.
How to implement it…
Review every marketing channel and calculate the return generated from each one.
Look at:
• Cost per lead.
• Cost per customer acquisition.
• Customer lifetime value.
• Sales generated.
• Gross profit generated.
You are very likely to discover that one marketing activity is producing exceptional returns while another consumes significant budget but produces very little.
Once you know the results you will have a choice. You can either redirect spend from poor performing marketing channels to high performing channels, or just cancel the poor performing channel and save the money.
Identify overheads that have grown faster than sales
One of the most useful exercises any entrepreneur can perform is comparing overhead growth against sales growth.
If sales have increased by 20% but overheads have increased by 35%, profitability will inevitably come under pressure regardless of turnover growth.
Pay particular attention to:
• Vehicle costs.
• Travel.
• Insurance.
• Utilities.
• Office costs.
• Professional fees.
• General administration expenses.
Look for categories that have increased significantly faster than sales.
These areas often reveal hidden inefficiencies or bad habits that have gradually developed as the business has grown. Small improvements across several overhead categories can have a surprisingly large impact on overall profit.
Key Takeaways
When business owners ask which costs look too high, they are often hoping for a simple answer.
The reality is that the answer is different for every business. What matters is understanding whether a cost is creating value and whether it is growing at a sensible rate compared to sales and profit.
The most effective approach is to:
• Review staff costs as a percentage of sales.
• Eliminate unnecessary software and subscriptions.
• Measure marketing based on return rather than activity.
• Compare overhead growth against sales growth.
Most importantly, remember that the goal is not simply to spend less – it is to spend better.
The businesses that generate the strongest profits are rarely the cheapest operators. They are the businesses that understand where every pound is going and ensure it delivers an appropriate return.
Want help understanding your numbers?
The answer to reducing costs (in the right way) is usually already hidden within the numbers.
A detailed review of your Profit & Loss account, Balance Sheet and key performance ratios can often highlight areas to improve both profit and cashflow.
If you’d like clarity on where profits are leaking from your business, which costs deserve attention and how to generate more cash from the business you already have, get in touch today.
If you’d like a chat to see how we can help drop us an email to [email protected] or call one of the team on 0161 410 0020.
Disclaimer
You must take professional advice before making any decisions based on the information that you have learnt here. While every effort has been made, to make sure it is accurate it cannot be precisely tailored to your personal circumstances. This article is for general information only and no action should be taken, or refrained from, as a result of this information. Professional advice should be taken based on specific circumstances in each individual case. Whilst we endeavor to ensure that the information contained in the article is correct, no liability will be accepted by Krystal Clear Accounting which is a trading name of Kim Marlor Associates Ltd or damages of any kind arising from the contents of this communication, or for any action, inaction or decision taken as a result of using any such information.
