At a time like this, money is tight for pretty much every business. Cutting costs can be a quick and easy way to improve the profitability of your business. Introducing cost-control measures can bring immediate savings and ensure you remain profitable in the long term.

But it’s important that you carefully manage cost-control measures. Doing away with unnecessary expenses is clearly beneficial. But if you cut costs without consideration of the consequences, you may end up with low morale or a drop in the quality of your services or products.

You can significantly reduce this risk is by identifying where you can safely trim costs, setting clear cost-reduction targets, and researching any cost-saving initiatives before changing your business.

Planning for effective cost-control

The first step towards reducing costs is to identify your major cost areas. These are likely to include:

• Production
• Purchasing
• Sales and marketing
• Financing
• Administration
• Facilities maintenance.

Start by studying your Income Statements for the last six months and rank all your expenses from highest to lowest. Then work your way down the list and identify areas where you can reduce costs. It’s a good idea to first focus on identifying cost-saving measures in areas where you’ll see the biggest return. For example, it’s smart to work toward saving 5% on a $200,000 expense rather than a slightly higher percentage on a lower-cost expense.

Try new ideas

You might find it’s difficult to anticipate savings without actually implementing alternative systems and processes. Remember that any changes you make don’t need to be permanent. If you aren’t sure if a cost-saving measure is suitable for your business, consider trying it for a few months then assessing the results. This way, you’ll soon get an idea of the real cost savings without having to commit long-term to new processes or changes.

You should benchmark any new processes or systems and frequently revisit them to ensure they are still suitable for your business. Consider asking staff for feedback around any changes to make. In this way, you will make sure there are no hidden problems that could cost you more than you save.

Quick savings

You can find significant savings without worrying about your product quality or performance. Here are the most popular ways to trim costs without making radical changes.

• Eliminate unnecessary costs by starting with waste reduction, heating costs, and utility charges.
• Reduce inefficiency by using technology for manual tasks or complete these tasks less frequently.
• Avoid frequent, small orders that cost more than larger orders and take additional time to complete.
• Reduce travel expenses by booking air travel earlier and using cheaper accommodation on business trips. Alternatively,  determine whether you can save the travel and have meetings using Zoom or other video-conferencing apps.
• Find alternatives to high-priced suppliers or negotiate better payment terms or discounts on purchased goods.
• Revise your credit policies to encourage prompt payment.
• Brainstorm quick cost savings with your staff. They might have some useful suggestions you may have overlooked.

Significant savings

Once you have identified your major cost areas, investigate potential ways to save money by changing your existing processes.

Here are just some of the most common opportunities. But before adopting any changes, be aware of any potential damage to your core business activities.

• Cut payroll costs by outsourcing non-essential activities.
• Redesign your existing processes to eliminate duplication and cut time wastage.
• Use current technology, or latest-industry thinking.
• Agree to long-term supply contracts, or guarantee a minimum purchase amount to secure better terms.
• Trim back or revise your current product offering and remove poor-performing products.
• Form strategic alliances with other businesses to buy larger volumes.
• Consider subletting office space, or moving to a more cost-efficient location.
• There may also be other costs such as long-term, fixed-rate business loans or fixed-price contracts for raw materials that you may reduce when these are up for renewal or tender.

Pitfalls to avoid

Reducing costs can have a negative effect, so you must be sure that changes will not compromise your operational performance.

Some common pitfalls include:

• Over-dependence on one supplier could put you at risk if your supplier fails.
• Reducing your marketing budget could affect your marketing strategy.
• Tighter control of business finances could leave you without a safety margin if cash flow becomes tight.
• Cutting short-term costs such as training, research, and development, or advertising can lead to long-term weaknesses.

Employee costs

Reducing employee-related costs is risky and counterproductive in the long-term. Reducing costs such as staff training or meeting times could lead to poor staff morale and reduced productivity.

Changing an employee’s terms and conditions can also create legal issues in some circumstances, so it’s always a good idea to get expert advice before deciding. Making employees redundant could bring short-term costs and the risk of possible employment proceedings. It may also contribute to low morale.

Maintain clear communication with employees to reduce bad feelings. Introducing cost saving through improved practices and procedures will require employee agreement, so it’s important your employees are aware of why you are making changes. Employees may need additional training and support over these periods.

Next steps

• Schedule a staff meeting to review your costs and brainstorm possible saving measures.
• Commit to an ongoing cost-control and monitoring process (or delegate to key staff to manage the process).
• If you need help in determining what costs you need to reduce, give Analytics Bookkeeping a call. We can work with you to determine the more efficient ways to get expenses under control.