An easy way for businesses to edge towards long-term stability is to keep a careful eye on their costs at all times. Standard operating costs apply to every business and are generally managed on a monthly basis, but they can quickly spiral out of control making it hard to keep up with all of the commitments you’ve made.
But before you reach cost saturation, you need to regain some control and focus on improving your profitability instead. Cutting costs is perhaps the quickest and easiest way to do this because the money simply remains in your business instead of being paid out.
Implementing a simple cost-control system can often be enough to create a culture of cost awareness. This will present your business with immediate savings and ensure a long-term competitive edge.
A good starting point is to identify all of your major cost centres, including sales & marketing, purchasing, production, finance and administration. Once you have these noted down, assess the profit and loss activity for the last six months and rank your overall expenditure from highest to lowest for each one.
This will not only highlight which areas of your business are a drain on your available capital but more specifically, where and how you could save money within them. And there will be some quick wins, as well as some longer-term opportunities to plan and save.
Either way, you need to make sure that your cull delivers obvious reward to your business so here’s six easy savings that you can work on straight away:
- Always check supplier invoices for overcharging, double-billing or missing discounts
- Cancel any unwanted subscriptions for magazines, associations or on-line forums
- Research new suppliers for fixed costs such as energy, water and insurance
- Look for viable economies of scale for any raw materials or stock you purchase, avoid frequent small orders
- Make a note of when current supplier contracts are up for renewal and research more cost-effective options
- Reduce overcapacity such as unused telephone lines, mobile phones and printers
In analysing your costs and seeking ways to reduce them, you should also keep in mind a realistic budget that you have available. This should consider your total capital for the full year, as well as a breakdown of projected spend per month, per cost centre.
This will allow you to record your actual costs against the budget you have allocated, identifying any discrepancies along the way. What you planned to spend versus what you actually spend can highlight more obvious cost saving opportunities for you to explore.
But be careful that your cost cutting doesn’t result in a drop in quality. You need to manage it carefully to ensure that any cost savings implemented are for the long-term benefit of the business and not simply a means to do business cheaper, this is not a sustainable strategy.
A good way to monitor this is to benchmark yourselves against other similar businesses and see how you compare to industry averages. Your wastage levels, for example, may be higher in comparison to others which presents a great opportunity to set goals and seek viable cost-saving solutions to be implemented over a given period.
You can also think more long-term when looking to achieve a cost-efficient business, especially if you have plans to grow and seek external investment to support this. Managing a business that keeps its costs under tight control demonstrates to potential investors that you are (or have the potential to) achieve the maximum profit levels should you meet the projected sales targets, but you will need to demonstrate that your current operating costs are sustainable.
A strategy that has plans to manage and review costs as the business grows will help to prove this long-term stability. Here’s some tips to think about now for cost benefits in the future:
- Plan to reduce wages by outsourcing work as required
- Identify opportunities for part-time instead of full-time employees
- Increase the use of technology and automation to replace manual paper-based processes
- Consolidate your purchasing window by building strong relationships with fewer suppliers
- Look to achieve long-term supply contracts with better benefits, including longer payment terms
- Review your finances and look to consolidate any debt to reduce repayment costs
- Look at your operating processes and redesign to avoid duplication of time and effort
- Encourage email and teleconferencing instead of travel and face-to-face meetings
- Look at your marketing (and advertising) and make sure that you have the right metrics to stop anything that isn’t generating a return
- Identify ways to get the most out of your premises by sub-letting spare space in the future – or relocating to somewhere smaller.
Building a culture of cost control is a good way to achieve these long-term goals. Make managers responsible for their own cost centres and build cost-saving objectives into business KPIs. Focus employees on looking for ways to save money by reviewing processes to identify the stages and tasks that waste time, or duplicate resource. Involve suppliers too to encourage a relationship of good negotiation and mutually beneficial terms and communicate with customers to manage expectations of a good product or service but without the unnecessary frills.
There are, however, some common pitfalls and you need to be aware of these for both the short and long-term. Some cost-cutting can have a negative effect on your business operations so before you implement any drastic changes, be sure that they won’t affect your ability to meet customer expectations and that your standards will not be compromised.
One area in particular to be mindful of is your available cashflow. A robust business can operate well on minimum costs but by implementing a tighter control of your finances, you may reduce any buffer you have available should cashflow become unexpectedly poor. Being aware of available finance options at this point is advisable to make sure you can keep your business afloat if need be.
Read our blog ‘How invoice finance can help your cashflow’.
So, if you’re looking to grow your business but need some advice on funding solutions to support long-term sustainability, speak to one of our advisers for some expert guidance on how we could help.