Managing your costs

There are two ways to increase your profits. The first is to bring in more money e.g. by selling more of your products or services, or increasing your prices (and your mark-up).

The second is to spend less. Small business owners typically focus on the first option, but reducing your costs is often a quicker and easier way to lift your profits. Here are some ideas to help you keep costs under control. Building a cost-conscious culture is the first step. It doesn’t mean penny-pinching or stressing over every dollar. But it does mean being aware of your business costs, so you can make sure the money is well spent. 

Make it a habit to review your ratio of overheads to sales regularly – monthly is best. Overheads are the ongoing expenses you incur in running your business like rent, power, telecommunications, advertising, etc. They aren’t costs directly associated to a business’ products and services, but allow the business to carry on with its activities. Keep an eye out for any changes over time. If costs are increasing in particular areas, find out why – and take action if needed.

Your Profit & Loss statement will list out expenses by different categories so you can identify specific trends (one of the advantages of accounting software is that you can generate a Profit & Loss statement anytime). For more on this, check out our guide on Understanding your Profit & Loss statement.

In most businesses, there are many opportunities to reduce costs without impacting on the quality of your products or customer service. Identifying them may require you to think outside the box a little and be willing to consider changing the way you do things. You may also want to brainstorm opportunities with your team or your support network. To get you started, here are some questions you may want to consider.

Technology can help you save money on everyday business expenses. For example, you may want to consider:

• Automating existing time-consuming manual systems – for example, accounting software can save you considerable time and effort which can go into other parts of your business. Check out our article on ‘Bank feeds for accounting software’.
  
• Using cloud-based services for your IT infrastructure or software rather than buying and maintaining your own.
• Using some of the multitude of free apps that are available. For example, use Skype or FaceTime instead of paying for phone calls or teleconferencing services; use Google Analytics to help manage your digital and social media activities; and use free versions of email marketing software rather than paying for bells and whistles you probably don’t need.
  

Many businesses, large and small, waste a lot of time and effort doing things they don’t really need to do, or doing things in inefficient ways. Improving the efficiency of your business gives you more time and resources to focus on important tasks, without increasing your costs. For example, meetings can take a lot of time and don’t always achieve much. Make sure any meetings are really necessary – could you achieve the same result with an email, for example? When you do need to have a meeting, set a strict time limit, always have an agenda and make sure any actions or decisions are clearly documented.

Make sure you and your employees are properly trained for their jobs – poor training can lead to errors and inefficiencies. Make it a habit to regularly review the way things are done in your business, and involve your staff – they are best placed to identify how things could be done better.

Consider getting rid of poorly-performing products or services, and for those products/services that are performing well, look at increasing production runs or allocating resource for greater efficiency.

It’s important to maintain good relationships with your suppliers, but it’s also important to make sure you’re getting the best value from them. Test the market from time to time by getting quotes from different providers for anything from raw materials, to telecommunications – in fact pretty much anything you buy for your business. You could also consider consolidating your purchasing so you buy from fewer suppliers – the more you buy, the better the discounts you may be able to negotiate.

Marketing is essential to reach your customers, but it can also be a major expense. That's why a great marketing plan should be a key component of your overall business plan. See our article on How to write a marketing plan for help.

If your rent is creeping up, talk to your landlord. They may be willing to review your rent, or perhaps link the rent to your turnover – if the business does well, they get a higher rent while if your turnover declines, so does your rent. Depending on your business, you may also want to consider moving to a more cost-effective location.

Finding, employing and training staff can be a major expense (and take up a lot of your time and attention). Rather than hiring your own staff, consider whether you can outsource some aspects such as administration, accounting, manufacturing, etc.

Whether you use a lot of power or a little, reducing the amount you use is good for business and good for the environment. Here are some simple tips:

• Turn off any equipment not in use and set computers and office equipment to go into ‘standby’ mode after 10 minutes or so.
  
• Choose energy-efficient appliances and equipment wherever possible.
• Switch off office equipment and lights when you leave (or fix timers to do it for you).
• Shop around to see whether you can get a better deal on power – visit the Powerswitch website to compare different providers in just a few clicks.
  

Save money and help the planet with a few simple changes. For example, reduce paper use by setting your printer to print on both sides and using waste paper for jotting down notes; reduce or recycle packaging, buy reusable cups, glasses and towels rather than single use paper cups or paper towels; consider buying used equipment instead of new, etc.

Ongoing expenses like phone contracts, regular advertising, sponsorships, subscriptions, software licenses can all bleed money from your business. Review them regularly to make sure you still need them – and if you don’t, stop them as soon as possible. Company vehicles have a lot of ongoing costs, such as insurance, fuel, registration and more, so make sure you really need them. Explore alternatives such as car share schemes or Uber. Business travel can also chew up a lot of cash, so make sure any travel is really necessary or will deliver tangible returns for your business. Also consider whether you can use Skype, phone calls or videoconferencing to achieve the same objective without having to physically travel.

If you have staff, get them involved. They will often have a closer understanding of exactly where you can reduce costs in the business than you do. Your accountant will typically have experience with businesses in many different industries so should be able to help you identify opportunities to reduce costs. They may also be able to tell you whether your business is performing better or worse than the average for your industry.

Cutting costs is good, but it’s a balancing act. Be careful that any initiatives don’t damage the long-term health of your business. Here are some things to be wary of:

• Over-dependence on one supplier – reducing the number of suppliers can save time and deliver more bargaining power, but depending on one supplier puts you at risk if they fail.
  
• Controlling finances too tightly can leave you without a safety margin. Obsessing over every penny can also be bad for morale.
• Make sure you continue to invest in important areas like training, advertising, new product development and so on. Failure to invest can weaken the long-term viability of your business.

Remember, we have a team of experienced business specialists throughout the country who are here to help, whatever your industry or business size.