.png){kind=logo}
Times are tough right now for small businesses. Demand isn’t great and costs have been rising relentlessly. Many small business owners need to pull all the levers they can to improve the profitability of their businesses. For companies where margins are under pressure, the obvious place to look first for profit improvements is the cost base.
Some cost saving methods require you to change your business processes — to do things differently, not just more cheaply. For example, ‘Lean’ management techniques can reveal ways to improve business efficiency that traditional cost cutting overlooks. Zero-based budgeting can force your managers to think radically about costs rather than continuing to do what they’ve always done.
But these approaches usually require time and effort to be successful.
This article isn’t about altering the way you do business. In this article, I’m going to provide you with a list of simple cost cutting ideas that can boost your margins quickly. If you haven’t done a top to bottom cost review for a while, you’ll find a surprisingly long list of issues you could work on.
As you read this article, you’ll see that a few of my cost-saving suggestions will initially be negative for your cash flow. If you have plenty of cash on hand and your business is generating more cash each month, these could be good options for you.
But be clear about your circumstances and your objective. If your company is short of cash then boosting your cash inflows may be a higher priority right now than optimising your costs. If so, here’s an in-depth article that contains several ideas for improving your business cash flow.
Meanwhile, here are tips on how to save money in your small business:
Cut excessive service levels to customers that don’t warrant it
Most industries have a service component to them. That’s usually because good service helps you win repeat sales. But even if what you sell rarely leads to recurring revenues (e.g. an estate agency) you still want to gather positive testimonials and recommendations.
So if excellent service plays an important role in driving sales, then the better the service you provide, the more successful you will be — right?
This thinking can lead companies to fall into the trap of providing an economically unjustified level of service. Intensive and high quality service is expensive and needs to be paid for. Service level must be factored into the price that customers pay.
This is not an argument for cutting service levels across the board. Rather, it calls for managers to segment their customer list according to the priority and profitability of the account and take case by case decisions about service levels based on objective criteria:
Is the client a large, highly profitable account for the firm or a small one that doesn’t buy enough to justify more than bare bones service? Is the customer a frequent repeat buyer or someone who buys only occasionally?
Is the customer a large future prospect who should be treated like royalty (e.g. a blue chip corporate or an ultra-wealthy individual) or are they a middling customer with no realistic potential to buy more?
There is an old saying that work expands to fill the time available to complete it.
Don’t allow your sales team to fill their days over-servicing low priority accounts. Sales staff often lavish great service on accounts where they have a great rapport with the client even though the account is a low priority.
Instead of that, put in place a formal system for service levels based on objective criteria and disciplined customer tiering. Then coach your sales force to use their newly freed-up time for winning some new customers to add to your existing ones. Or simply reduce your costs by letting go of the weakest performer on your sales team.
Of course this can require you to have some difficult conversations with customers. You can soften the edges of any changes by presenting it as a company-wide overhaul of policies, emphasise the value of the benefits your customer will continue to receive and perhaps repackage the service levels you provide to avoid an apples-to-apples comparison with the past.
But remember that these conversations will be with customers who are under-paying you. The result can sometimes be positive — which is of course the aim. Customers often know they have been receiving a better service than their buying volume warrants. If they value the service you have been providing, they may direct more business to you in order to keep it.
Improve your procurement processes and negotiate better supplier terms
If you’re a manufacturing business or a service business that buys in a lot of outside inputs, your supplier costs may be an area where you can realise large cost savings. That’s especially so if it’s been a while since you did a top to bottom review of your expenses for purchased inputs.
If you are an established SME, investigate the scope to do one or more of the following for all your main inputs:
Consolidate your buying across fewer suppliers to leverage your buying power more effectively and capture more volume-based discounts.
Negotiate volume-based discounts that rise as the quantity you buy increases.
Ask for lower prices in exchange for a commitment to buy a guaranteed minimum volume of products. If you’re doing this already but are confident of buying significantly more than you have currently committed to, consider increasing your guaranteed minimum.
Ask your existing suppliers to re-bid for your business against alternative possible suppliers.
Focus most of all on purchases that are undifferentiated commodities. It may be wise to tread carefully when dealing with suppliers you’ve used for a long time and who play a key role in your ability to differentiate your own offering and impress your customers.
Even if you’re a micro enterprise with no purchasing power, you should at least screen the market regularly to make sure you are buying from the vendor with the lowest prices.
Remember that you can apply some of these buying tactics outside the manufacturing side of your business for purchases that are used in your sales and administration functions:
Upskill your non-core procurement. Non-manufacturing procurement is often handled by staff who are not buying experts. For example, the CFO’s assistant might handle buying new office equipment or supplies. Consider reallocating that responsibility to someone with buying expertise (e.g. your main purchasing manager) who will know how to obtain the best prices.
Make sure that people in different departments aren’t buying the same supplies from different sources. For example, do your Sales, Finance and R&D departments buy their printer cartridges or office furniture separately? If so, consider centralising your purchasing to capture any volume discounts. Even if you can’t save on unit prices, you would at least reduce your search costs — the time your staff spend researching the market to find the best offer.
Use a purchasing card system to buy low value items
For many companies, the 80:20 rule dictates that most of their purchasing by value is accounted for by a modest number of buy orders. That leaves them having to process a large volume of payments to suppliers for purchases of small value items.
This is very inefficient. You have to employ accounts payable personnel to match supplier invoices to purchase orders, send them to an approver (who must spend time authorising them) and then process the related payments.
You can avoid much of that administrative burden by using purchasing cards for smaller value items. By issuing cards to select staff and giving them authority to purchase specified categories of items for their own departments up to pre-set value limits, you can eliminate much of the authorisation bureaucracy.
Your staff attach the correct accounting cost code to their purchases via their card issuer’s online portal so that allocating costs is easy for your accounts payable team. Settlement via a single card payment eliminates the workload on your accounts payable staff for invoice matching and payment processing.
Your suppliers would need to be willing to accept card payments for low value purchases rather than payment via bank transfer. They would lose c2-3% of their revenue on those sales in card fees. But they would be paid in 1-3 business days instead of on normal credit terms, their staff would no longer need to spend time chasing overdue payments and they would eliminate bad debt risk.
In most cases this should be a win-win option for you and your suppliers.
Capitalise on prompt payment discounts from suppliers
Where your suppliers offer discounts for early payment, make sure you’re capitalising on them (assuming that the discount is worth more than the return you would earn on idle cash or the interest you would pay on the extra borrowing). If your larger suppliers don’t currently offer early payment discounts, ask about them.
Take advantage of seasonality to buy when supplier prices are cheapest
Prices for many supplies may remain stable throughout the year. But you might find you can bag a bargain on some products if you time your purchases right.
Here are two examples to work on.
Some businesses are especially keen to make sales in the days immediately before quarter end or year end. Their sales staff have targets to hit and, if they are just short of them, you may be able to negotiate a special discount if your purchase would help them meet their budget.
That could mean putting in an extra order that you don’t need right now or increasing the size of an order you planned to make anyway. Don’t be embarrassed to ask about a special discount — you might be doing them a favour.
In some industries, pricing may fluctuate during the year for seasonal reasons. For example, in some agriculture-related sectors commodity prices fluctuate depending on the timing of harvests (more expensive before, cheaper after). In some retail-related sectors, prices are higher when suppliers are running flat out to handle pre-Christmas orders. If you can be flexible about delivery times, ask suppliers when they would be able to offer you their best price.
If you’re going to secure bargain purchases by holding extra stock, be disciplined about it and don’t take on more inventory than you’re sure you’ll use. Calculate your stock holding costs carefully and beware of stock obsolescence.
Reduce the cost of internal processes where quality is needlessly high
Some companies could save money by reviewing costly internal processes and asking whether the quality (in terms of accuracy, presentation etc) needs to be as high as it is. It might be that you could achieve the same perfectly acceptable outcome with a reduced level of quality.
Here are a few examples:
When finance teams produce monthly financials, they often follow the same exhaustive processes that they do for annual accounts. They book and reverse cost accruals for recurring items that barely vary from month to month, make multiple adjustments to correct for errors that in aggregate are immaterial and so on. The marginal additional accuracy may make no difference to management decision making and come at disproportionate cost.
Senior executives sometimes request staff to provide them with analysis of a particular issue. Without further instructions, staff usually produce a high quality, detailed response. Yet the person asking the question might have been happy with a five minute answer. Senior managers can save staff a lot of time by specifying the quality of output they need from such ad hoc requests.
Some areas of excessive quality are humdrum but cumulatively they add up. Does your company order expensive stationery when cheaper options would work? Do you produce coffee and biscuits for internal management meetings when they’re really not needed?
Use technology to automate manual processes
Review all your main business processes, identify the steps that are done by people and investigate whether you could replace human intervention with technology.
A good shortcut is to look around your workplace and, for every piece of paper you can see, ask why it exists and whether the work step could not be automated.
This is not a call to cut your headcount. Many companies are currently struggling to find enough qualified staff. Automating some manual work steps using technology would likely free your staff from doing low value added work and enable them to spend more time on higher value projects (developing new products, winning and servicing new clients etc).
Automation should be especially cost-effective when the work step being automated is complex and/or requires expert staff. For example:
Even if you run a micro enterprise don’t try to operate without modern accounting software. Aiming to keep track of your revenue, costs and stock with a spreadsheet will turn out to be a huge false economy.
If you have any employees, using payroll software is a no-brainer — it cuts errors that are otherwise almost bound to arise and will save you a lot of time.
Review your subscriptions and other recurring payments
Small businesses buy lots of things via subscriptions or other forms of recurring payment, including:
Software licences (Microsoft 365, accounting, CRM, social media management etc).
Utilities (gas, power, water, telecom, broadband internet)
Memberships of professional bodies and industry associations.
Subscriptions are convenient and efficient. You decide what you need, you set up the arrangements and then you don’t have to think about it any more.
But that’s also a problem — you might stop noticing how much they cost. Here’s the downside to subscriptions and recurring payments:
Vendors implement repeated above inflation annual price increases without you realising.
Subscriptions remain in place when they’re no longer needed without anyone thinking to cancel them. This happens when staff move teams within your company or when they leave your firm altogether.
The vendor mistakenly over-bills you and nobody notices.
The vendor redefines their plan structure and upgrades you to a premium plan without you realising.
Review all your subscriptions and other recurring payments and cut the things you find you don’t need any more.
Optimise your utility and related costs
For your utilities, make sure you’re following these basic good housekeeping practices to avoid unneeded costs:
Your electrical and electronic appliances should automatically switch to low power standby mode or be turned off when they are not in use.
Your air conditioning system should go off outside office hours. Your lights should automatically switch off when rooms have been empty for a few minutes.
Check that your heating and air conditioning thermostats are set to efficient levels (e.g. don’t over cool your office in summer).
Replace conventional light bulbs with LED bulbs.
Make sure you’re on the best available utility tariff — try an energy switching service, of which there are plenty. And don’t miss out on any official support you might be eligible for — check the UK government website for more details.
For voice calls, use a VoIP system (Teams, Skype etc) when possible — it’s cheaper than using conventional phone calls.
Be smart about how to spend on travel & entertainment
Travel and entertainment can play an important role in helping to win new client business but expenses should be necessary, proportionate to the objective and cost-effective.
Here are four areas of spending to review.
First, travel to client meetings. This might look like a simple yes/ no question: does someone need to attend in person or could we hold a virtual meeting instead? Yet these days meetings can almost always be held virtually. That doesn’t mean it’s the right option in every case.
One consideration is the status of the client and the amount of potential business on offer. Is the meeting with a large existing ‘platinum’ client or with a smaller account that is unlikely to give you large amounts of business on a regular basis?
Another is the time and cost involved. But don’t just consider this issue in isolation — a more subtle decision process is usually best. For example, if the meeting involves national or international travel, will the meeting be in a city where you could arrange other meetings alongside the one that constitutes the primary purpose of the trip? Would those other meetings make the trip much more valuable? Would they justify a trip that would not be viable for just one meeting?
In any event you should never make a long trip for a single meeting when you could proactively add on several other useful meetings while you’re there.
It doesn’t matter how important a client is — there’s no excuse for wasting company money.
Finally, consider the frequency of in-person meetings you need with a client. If you have a long-standing major client that you’ve always visited in person twice a year, do you need to keep making the trip that often? If the personnel in the relationship are the same, could you save time and money by swapping one meeting for a video call? Your client is unlikely to mind.
Second, attendance at industry conferences, trade fairs and the like. Many companies often send more than one member of staff to industry events. Do you need to?
Think carefully before cutting your attendance. More junior staff often see event attendance as a valuable ‘perk’ of their job. Will the cost you save be more than offset by a negative impact on staff morale and motivation?
If you doubt the rationale for sending more than one person, tell your team that you can only support their attendance if each participant books up a healthy diary of meetings with contacts well in advance of the event. That might enable you to keep sending more than one person and do wonders for your lead generation efforts at the same time.
Third, client entertainment. Of course, focus your budget on the clients that matter most and who expect to be entertained. At the same time, make sure you have clear and appropriate rules and guidelines in place for cost per meal or per client. It’s only good practice.
Finally, the Christmas party. If you want to save on the cost, choose a cheaper venue or even try switching it to the summer — it’s much cheaper and a garden party in the sun may even be more enjoyable. If you’re feeling radical, you could cancel the Christmas party altogether and buy everyone a cake on their birthday instead. It would be much cheaper and you would celebrate something personal for each member of staff every year.
Don’t replace departing staff like-for-like
If someone leaves your company, don’t default to hiring a replacement on a like-for-like basis. Use it as an opportunity to re-evaluate the best way of executing the tasks that have been assigned to the person in that role.
Would any of these options be a more cost effective option for your company?
Hire someone less experienced. Perhaps the role doesn’t need someone as senior as the staff member you’ve lost. Could you hire a new full time employee at a more junior level with less experience and train them up in the role?
Split the role in two. Many talented women (and some men) with young children struggle to find skilled, purposeful roles they can combine with being stay-at-home mums (or dads). Could you split a full time role into two part-time roles of half a day each?
In the modern era of remote working, such an arrangement can work very well for qualified people who are out of the full-time job market for a few years but would love the chance to keep their skills sharp and bring in some extra income while balancing work and home life.
As an employer you could hope to gain two benefits:
The two part-time, remote-working staff should work out cheaper than a single full time, office-based employee. That’s mainly because employees who need the flexibility of a skilled but part-time, home-based role usually have less bargaining power over salary than employees who are willing to work full-time and commute into work. You would also save on office overheads.
Few roles require an employee to have just one set of skills. By splitting the full-time role, you could hire two part-time staff with different skill sets. You could then split the responsibilities of the role in two and allocate the work to people with more specialist skills than you could before.
Alternatively, could you significantly reorganise your workflows? See if you could reconfigure your work streams to make them more efficient and just allocate the tasks of the departing staff member to the remaining members of your team.
You could also try automating some of the responsibilities of the role.
Finally, should you outsource the role? We’ll discuss that option next.
Consider outsourcing — but only where it makes sense
If a staff member leaves your company or you need to let someone go for performance reasons, you could consider outsourcing the tasks the departing employee previously carried out.
Outsourcing is often bandied about as a cure-all way of cutting costs and it can indeed be used for that purpose. But be careful — it’s not a panacea. As you evaluate the scope to outsource work, you should ask yourself a few basic questions.
First of all, we can view the outcome of a piece of work along three axes:
Cost
Quality
Timeliness
If you’re outsourcing to reduce cost, will you have to sacrifice some quality or timeliness in return?
The only logical way you can obtain an equivalent result at lower cost via outsourcing is if the outsourcer has some structural cost advantage over your own firm in executing that function. After all, simply moving a task from your own firm to a supplier firm doesn’t achieve anything by itself except adding negotiation costs and a supplier’s profit margin.
That said, outsourcing can reduce costs significantly in some situations. To take a classic example, if you outsource your IT support function to a supplier based in India or the Philippines, you may be able to secure equivalent levels of expertise from staff who are paid a much lower wage than you would need to pay your own on-site staff.
Even here though, be mindful that outsourcing can involve compromises. For example, strongly accented overseas IT workers communicating via poor quality VoIP phone lines may not be able to offer the same quality of service that you have been used to, no matter how good their functional skills. And time zone differences might result in less timely support.
Are there any ways you can reduce costs by outsourcing a role to a local supplier, based nearby in your home market where loss of quality and timeliness might not be such a risk? The answer is yes.
An outsourcer should be a specialist in the function you want to outsource (e.g. HR or accounting). By servicing many different clients they may be able to keep their staff fully occupied around the clock all year. By contrast, you might find there are slack times when your own staff member might not have enough work on to stay busy.
You might be employing a generalist staff member with lower skill levels than an outsourcer would have. As a result your company takes longer to complete a task than the outsourcer would.
In either of these two cases, outsourcing to a specialist might be a cheaper option than carrying out the role in house.
If you do decide to outsource, consider your needs carefully. If the function you would like to outsource isn’t critical to how you service your own customer, that should be fine. By contrast if the function you are considering outsourcing is mission critical for your company you should consider carefully whether outsourcing to cut costs is the right thing to do.
It's worth noting that many companies outsource activities not to reduce cost at all but rather to gain access to more specialist expertise than they could support in house. Good examples include advertising and the law.
Finally, bear in mind that outsourcing often involves compromises, even if you don’t expect it will when you enter into the arrangement. Most obviously, you suffer some loss of control (which often manifests as slower response times). In addition, you may become more dependent on your outsourcing partner than you expect — or would like.
For these reasons, buying based on the cheapest offer is often not the right option.
Make sure your outsourcing partner is someone you can build a relationship with and will be able to rely on. Plan to give them enough work and pay them enough that they will care about your account.
Offer your staff perks and benefits they value instead of higher pay
Don’t fall into the trap of thinking that the only thing your staff are motivated by is money. Of course nobody turns down a pay rise. But for some of your staff, other factors may be more important.
This can open up opportunities to retain and motivate good staff at a lower cost than you might otherwise incur. The key is to identify non-salary benefits that don’t impose a significant cost on your company but which are highly valued by your staff.
Most obviously, staff with dependents may value the ability to adopt flexible working hours. Those dependents are often children but can also be an elderly parent. Yet the desire for more flexible hours is shared by some people who don’t have dependents but would just prefer a better work life balance.
‘Flexible’ hours might mean that a staff member works hours that are fixed but out of line with the normal hours the rest of the team follows (e.g., a later start and finish time). Alternatively, it might involve the ability to adjust their hours on an ad hoc basis (in coordination with their line manager) to suit their week-to-week needs.
Other elements of flexibility could include the ability to ‘buy’ extra holiday days above their normal annual allowance and the ability to work from home on a set number of days of the week.
And it’s not just about quality of life. Flexibility can be financially very valuable for staff with dependents. It may enable them to avoid cash expenses they would otherwise incur (e.g. to pay for a child minder or a carer). It could even enable them to work and earn a salary when they would be unable to do so if they had to work standard fixed hours.
So taking a flexible approach to working hours can create very strong win-win benefits for your company and its staff.
Employers often provide staff with other non-salary perks and benefits (e.g. subsidised gym fees, private medical benefits). Check whether your staff value them. Don’t carry on paying for benefits that your staff aren’t using. Stop the benefit and replace it with something your staff value more highly.
Engage the energy and know-how of all your staff to bear down on costs
Your staff often know best where the excess costs are in your business. So if you want to know where you can find costs to squeeze out, ask them.
Be sure to engage their commitment by demonstrating sincerity. Make sure they don’t think it’s a pro forma ‘consultation’ ahead of job cuts:
Give your staff advance notice that you’d like to hear their best ideas for streamlining costs. Pick a convenient time for individual or group discussions.
Explain why you want their views. Highlight that times are tough and you’re looking to protect profit margins. Emphasise that this will benefit everyone, including staff.
Allow enough time. Give everyone the chance to contribute who wishes to, from the most senior to the most junior. Those who are closest to the costs may have the best ideas about how to cut them.
Don’t just ask for their opinions — really listen to them. Make it a two-way dialogue. If someone highlights a problem area for costs, ask if they can suggest any good solutions.
Provide follow-up afterwards. Tell them which ideas you are taking forward. If you’re not going to pursue some suggestions, explain why.
Once you’ve implemented suggestions from your staff and are seeing the benefits, make sure your staff know how much you appreciated their input. Celebrate cost ‘wins’ by communicating them publicly. Make sure staff who have been particularly creative around cost reduction know they’re seen as role models.
Creatively reduce the space you need to own or rent
By now, you’ve hopefully identified several areas where you can cut costs. You might find you’ve digitised previously manual processes, outsourced some functions and have one or two more staff positions filled by employees who work from home.
Do you still need all your space? Whether you own or rent your property, space is expensive. If you can use less of it, you could save a tidy sum of money.
So do a space audit. Investigate whether you can find more space savings on top of any that you have already realised from the factors mentioned above.
In your office areas, check your filing cabinets and cupboards. For old records you no longer need to keep close at hand, dispose of them securely or store them cheaply off site. Don’t let staff ‘own’ big filing cabinets – they are usually full of junk.
Check your office equipment and supplies. Do you need three printer/copiers, or would two be sufficient? Why do you still have a fax machine? Do you need such a large amount of printer paper and stationery on hand?
Take a look at desks/ workstations. If you’re using old monitors, new thinner ones take up less space. If staff still have too little space to work in, it’s often because their desks are untidy. Imposing a clear desk policy generates grumbling at first, but it creates a more efficient work environment. Staff aren’t helping themselves if they can’t find anything — they will thank you in the end.
Now review the layout of your office. You shouldn’t want to cram employees uncomfortably close together (and you must follow regulations about minimum floor space per employee). But you may find that all your staff could comfortably fit into a smaller area. If so, get rid of those old, worn-out workstations and buy them all a shiny new, smaller one.
Hopefully you work in a building where the walls are moveable. If so, you could just reconfigure the space to your needs and partition off the rest. You could then consider not renewing the lease on any area you could hand back to the landlord. Alternatively you might be able to sub-let the space to a startup micro business that just needs a small amount of floorspace.
If you can’t reduce the area you rent or sub-let any surplus, then you could use it for an alternative purpose. For example, you could create a new, improved meeting room for entertaining clients. Or you could turn some of your space into a break out area for staff.
Either way, you will boost staff morale by giving your office a makeover and you could even save yourself a significant sum of money in the process.
Use surplus cash to repay debts and reduce interest costs
Many businesses finance themselves partly with loans and keep a cash float on hand to deal with short-term fluctuations in funding needs. This was an easy strategy to follow in the era of ultra-low interest rates when borrowing was very cheap.
Now that the ‘free money’ era is over, re-examine how much surplus cash you have on hand. If you operate in an industry where demand is stable and predictable or you’re confident in your short-term cash flow forecasting ability, you could use any surplus cash to pay off some of your loans early.
Give your G/L costs a finale line by line review
Finally, skim through your General Ledger line by line to make sure you haven’t missed any material cost categories that could offer savings potential.
As you do so, ask about every line item: does this spending enable us to better service our clients? If not, do we need to incur this cost?
Comments