Reducing Costs and Improving Profitability

Find out how to reduce costs and build your bottom line.

Cutting costs is arguably the quickest and easiest way to improve the profitability of your business. Introducing a cost-control system can bring immediate savings and ensure that you remain competitive in the longer term.

Systematic Cost Control

Start by identifying your major cost centers. These may be purchasing, production, sales and marketing, finance and administration. Assess your profit and loss statement for the last six months and rank all your expenses from highest to lowest then start working your way down, identifying areas where you could save costs.

Focus on applying cost-saving tactics in areas where you’ll see the most reward, for example:

• Can you save on wages by outsourcing some work, or employing someone on a part-time basis rather than full-time?
• If insurance costs are high, try searching for a new, cheaper supplier.
• Other costs such as long-term fixed rate business loans or fixed price contracts for raw materials are hard to control in the short term. However, make a note of when these are up for renewal and plan to tender out to suppliers.
• Check insurance policies for over-coverage.

Comparing Actual Costs with Budgets

Record your actual costs and compare them with the amount allocated in your budget. Try to work out why there is a discrepancy between what you planned to spend and what you actually spend. The larger the cost overrun, the more scope there should be for savings.

Costs that are higher than your budgeted costs usually indicate room to reduce costs.

A spreadsheet is an easy way to record and compare costs on a monthly basis, though ideally you’re using accounting software to do this for you. Industry software will provide more specific budgeting tools.

Benchmarking your costs against similar businesses will help identify if you’re above or below industry norms. For example, your wastage levels might be higher than the industry average, triggering the opportunity to drill into why and solve the issue.

Who Should Be Involved?

Some costs will be easier to control if one person is responsible for that cost throughout the business. Get your employees involved in cost control. Give them an incentive to suggest cost-saving ideas and ask what causes them problems or wastes their time.

Employees are more likely to co-operate with cost-control initiatives if you explain the reasons for changes and they understand the benefits to the business.

Include your suppliers. Once they are aware you’re watching costs, they may start sharpening their pencils, especially if they know the other purchasing options available to you.

Easy Savings

There are some costs that can be reduced with little risk of an adverse impact on quality and performance.

• Carefully checking supplier invoices for overcharging. Common examples are double billing, incorrect charges and missing discounts.
• Eliminating unnecessary costs. Get rid of obvious overcapacity such as unused subscriptions, and paying for software features or capacity you don’t use.
• Measuring the return on all advertising to eliminate what doesn’t work.
• Finding alternatives to high-priced suppliers, or negotiating discounts and better payment terms.
• Avoiding over-specifying, such as high-quality components for a low-quality product.
• Eliminating inefficiency. Identify manual, paper-based systems that could be computerized.
• Avoiding frequent small orders if you can afford to buy in bulk for discounts.

Other Saving Opportunities

In some cases, reducing costs will require you to change the way you do things, for example:

• Reduce payroll costs by outsourcing activities.
• Redesign processes to eliminate duplication of effort and time.
• Make more use of technology and automation.
• Consolidate purchasing with fewer suppliers to get better discounts and build stronger relationships.
• Agree to long-term supply contracts or annual purchase volumes in return for lower prices and negotiate longer payment terms.
• Trim back your product range and increase production runs.
• Get the most out of your premises by sub-letting spare space.
• Allowing more staff to work virtually/at home to save office space.

Potential Pitfalls

Reducing costs can have a negative effect so before you make any changes, check that your standards will not be compromised, and that your ability to meet objectives will not be harmed.

Almost every cost saving has a potential downside. For example:

• Over-dependence on one supplier puts you at risk if the supplier fails.
• Production and marketing plans driven by cost-cutting considerations are less likely to be responsive to customer requirements.
• Tighter control of financing may leave you with no safety margin when cash flow is unexpectedly poor.
• Cutting short-term investment costs such as training, advertising, equipment or new product development can lead to long-term weaknesses.

Next Steps

• Rank all expenses from highest to lowest, list your major cost centers (purchasing, production, sales, administration), identify savings.
• Review productivity per employee, cross-train to reduce dependency and overtime costs
• Automate repetitive administrative tasks (invoicing, data entry, reporting), and implement cloud-based systems to reduce IT infrastructure cost
• Renegotiate lease terms or consider relocation to cheaper premises, implement hot-desking and flexible workspace arrangements.
• Map all business processes and identify bottlenecks, eliminate duplicate processes and unnecessary steps.
• Measure ROI on all marketing activities and eliminate low-performing channels, focus on digital marketing for cost-effective reach, implement customer retention programs to reduce churn.
• Finally, remember to include your business advisers in your cost-control program.