Lower-than-expected business profits in your financial reports may indicate a need to reduce expenses and avoid overspending. Consistent small savings can result in substantial profit increases over a year. Reducing costs is an effective and necessary strategy to increase profitability.
Profit and profitability aren’t solely based on sales revenue. Furthermore, the most profitable business isn’t always the one with the most sales or even income. Expenditures of various types have a huge impact on the profitability of any business and good management that understands all the ways costs are impacting the business profits is vital.
1 - Reducing Labour Costs
Many business owners enjoy having a high staff count and the satisfaction of giving people jobs. However, as most are aware, labour costs are among the largest cost to any business.
Systemisation may be an option depending on your business. Putting in various procedures or even software can help reduce the overall time required to complete common tasks.If enough systems are reducing enough time, it’s possible to reduce the number of staff or hours they work weekly.
Considering the actual cost of labour includes not just the salary or annual rate. Superannuation and possibly tax penalties for larger numbers of employees need to be factored in also. There are real savings to be had if staff reduction is an option.
Taking that thinking further, some businesses can even benefit from automation. While it’s sad the world is going that way, labour costs, unfortunately, make automation necessary for some companies. A single machine can often replace several workers and be operated by fewer people than it replaces. Perhaps the initial investment in purchasing the machine is viable? You must consider maintenance and running costs along with downtime for repairs or maintenance, but for some, this is an avenue to reducing labour costs.
Outsourcing is yet another option for some businesses to reduce labour costs. Perhaps you can outsource tasks to a company and avoid paying superannuation and other associated costs of an employee. Outsourcing often saves you and your team management time and can open up access to a wide range of expertise that you wouldn’t have in-house. Sometimes, you may tap into a higher level of service or quality of work than you have now.
2 - Marketing Costs
Marketing is important to most businesses and all too often one of the first things to be dropped as an ‘unnecessary cost’ when times get tough. Try to avoid that. When times are tough is when you need your marketing the most. For marketing to be effective, it often needs consistency over time to maintain its effectiveness.
However, poor marketing can waste money and not produce a return on investment. So if spending dollars on marketing, do your research and constantly monitor the effectiveness. Don’t assume because a marketing company or an in-house campaign was doing well for you earlier that it is still performing well weeks or months later.
3 - Material Costs
Businesses that deal with materials (timber or steel, for instance) obviously already, or should, look for cost savings in that area regularly. However, it is easy to let extended periods of time pass and forget to price check the materials you are purchasing. Setting a schedule to check pricing and chase better deals is a good option.
If the business can afford to, buying commonly used materials and hardware in larger quantities can also provide savings long-term. This can make allocating costs of these materials to specific projects accurately more difficult, so this strategy isn’t for everyone. Also, products with a shelf life may not be suitable depending on the product’s turnover.
This is all probably fairly obvious, but worth mentioning regardless.
4 - How to Define What Costs to Cut?
For most, cutting costs isn’t as easy as it sounds. Cutting costs can cause less obvious issues or even create costs in other areas.
Identifying items, products and services that are unnecessary to your business is a good place to start. An example might be paying for doormat services, office plants that are managed by an outside company, or even cleaners. Rather than paying cleaners to come in, look at what staff might be able to help. A small business might have people in their office who can clean their own floors and empty bins every few days.
These days cleaners often demand much more per hour than your staff to do something that’s really not complicated. Weigh up the time it takes to do the cleaning against the money a staff member could make the business in that time. Sometimes, outsourcing looks expensive if only viewed as a cost, but is actually worth it.
Anything that doesn’t directly make your business money should be assessed. If it’s not making money, then it needs to provide some other substantial (and vital) benefit to the business. If it doesn’t, it might be worthy of culling.
Don’t blindly think that a small percentage saving isn’t worth the effort. On a high cost item, a small percentage can equate to a large saving. Whereas a high percentage saving on a low cost item can equate to less of a saving.
5 - Re-negotiate and Seek Out Deals
Re-negotiate and Look For Deals
Constantly renegotiating with your creditors, including utility providers, where applicable, can yield big savings in costs leading to increases in business profits. Scheduling to investigate if you are getting the best deal for your business on some sort of regular basis ensures you aren’t missing out on better deals.
Retailers and other businesses can also talk to their bigger suppliers about deals on older stock, seconds, package damaged stock, bulk buys or alternative brands to cut costs. Do this on a regular timeframe and you might find you regularly hook great savings. If you don’t ask, you probably won’t get. And if a supplier knows you are interested in such products, they are more likely to offer them to you before you even ask.
Baby Steps Add Up to Giant Leaps in Business Profits
A year is a long time, so even small cost-cutting adds up to large savings and an upward trend in your business profits. This is especially beneficial to a business that relies heavily on cash flow.
If you have questions, you may find answers here: FAQ