When expenses surpass revenue, some business owners may go into panic mode, restructuring from top to bottom or in the worst case scenario, shutting down. Before taking on such a major task, however, consider small cost-saving methods, such as reducing travel expenses and conserving office supplies.
Without improving existing operations, however, the savings experienced from a superficial cost reduction may be short-lived. Eliminating inefficient processes and wasteful spending should be a top priority.
That doesn’t mean reducing expenses by eliminating personnel and decreasing inventory, because those steps can cost you more than they save. Cut personnel and you reduce personal service to customers. Cut inventory and you create unsatisfied customers.
Here are some quick and inexpensive ways to reduce business costs:
Eliminate writing checks by using a business credit card or Automated Clearing House (ACH) payments. Emailing invoices and accepting credit card or ACH payments can eliminate the paper and postage costs of mailing bills. Electronic billing also saves time and effort, reduces labor expenses and accelerates cash flow.
And while credit cards do carry a fee, they also offer the security of guaranteed funds, unlike checks.
Moving your company’s business to a single supplier or service vendor offers greater efficiency than using multiple vendors. Using a single vendor could result in discounts on some services, thus saving you money.
In the case of print and mailing house services, for instance, a single vendor can reduce expenses, particularly if you renegotiate prices frequently. Get vendors to compete for your business and let them know you’re soliciting bids from others. This will help ensure you get the best prices.
Standardizing contracting processes, made possible by consolidating supply and service vendors, can help you eliminate redundancy and overcharging. Some communities feature local buying organizations that gather all the local businesses in the area and use their collective buying power on behalf of all the members.
Make an annual or semi-annual review of all your key vendors a standard practice in your company. Also, make sure you flag all automatically renewing contracts to pop up for review and rebidding 60 to 90 days before their expiration date.
Practice fiscal discipline
This goes for you as well as your company. Don’t use company funds for personal expenses, even those related to work. If you have a huge office with expensive furniture, tone it down. You may be sending the wrong message to your employees. Making smart and frugal choices will let your team know that excessive spending is not okay, while inducing them to help keep expenses in check.
Also, encourage your team to submit cost-cutting ideas and recognize them at staff meetings when they do. Walmart’s innovation of having someone greet shoppers at the entrance was an employee suggestion.
Talk to your banker
Your banker can show you techniques to help manage cash flow, streamline the payments process, control expenses, free up cash to grow your company, and offset some of the rising costs that come with any business.
Your banker is also a good source for industry trends and best practices learned from other clients.
As you may know, there are two types of expenses: fixed and variable. Fixed expenses or costs that do not fluctuate with changes in production level or sales volume. They include rent, taxes, insurance, dues and subscriptions, equipment leases, payments on loans, depreciation, etc.
Seemingly rigid, fixed expenses nevertheless can be reduced through negotiation, such as altering the length of a lease or adjusting buyout costs at the end of the lease. Insurance costs may be reduced by adhering to safety directives and practices and changing the type of coverage.
Variable expenses can change with production volume and company activity. Examples include raw materials, packaging, and labor directly involved in a company’s manufacturing process.
Variable expenses can change radically from month to month, rising and falling with sales. Large payments that seemed doable when the order was placed may suddenly create a drain on resources.
Business writer Tom Egelhoff suggests listing all of your variable expenses over the past three years, calculate the highest amount paid and the lowest amount paid for each period and keep it handy. When the bill for a variable expense comes across your desk, compare it to the high and low for the corresponding time period. If the amount is out of line, do more investigating.
Expenses vs. investments
In an attempt to reduce expenses, many business owners turn first to cutting or eliminating marketing or advertising costs, which provides immediate relief. Egelhoff, however, says advertising or marketing that produces paying customers and brings in more than it costs is not an expense, it’s an investment.
Such marketing “investments” include business cards, letterhead and envelopes, which should belong under advertising expenses rather that office expenses. Those items still cost money, but contribute to an increase in sales.
And while there’s no harm in conserving office supplies like staples and paper clips, those kind of items rarely influence the bottom line, Egelhoff says.
Improving efficiency has long-lasting benefits beyond reducing costs because it can also help the company run more productively and deliver better service to customers.
With proper planning and commitment – plus help from your accountant – you should be able to reduce your business expenses and keep them in check.