One of the most effective—and easiest—ways to grow profits is to manage costs. Controlling expenses allows your business to keep more of every sales dollar, efficiently use precious capital, and maintain a competitive edge.
Cost management requires finding out which expenses are needed, and which can be reduced or eliminated. A thorough cost management approach starts with four steps.
Step 1: Perform an expense analysis.
Do you want to save money? Improve cash flow? Increase overall profits? Start by creating a sound budget. Then, adhere to it and constantly analyze your income statement against it to question expenses. Each month look at every expense line item to see what changed in the last month, the last quarter, and the last year. Ask yourself:
- What are my biggest costs?
- Which expenses are growing fastest?
- What changes (new technologies, competitive market dynamics) do I see in the supplier market that might allow me to lower my costs?
Challenge every expense and assume your business is spending too much. Whether pricing insurance or materials, take time to question costs, shop for better prices, and look for new vendors. In today’s virtual world, it’s never been easier to find the best deal.
Understand the concept of strategic costs—the expenses that return your company the most money—like quality materials, extra customer service, or some other defined competitive edge. Test everything else and determine ways to reduce or eliminate those costs.
Step 2: Embrace new trends and technologies.
The digital age has created opportunities across all industries to increase operational efficiency that can save your company money and pad your bottom line.
Outsourcing - For part-time positions or fluctuating workloads, consider hiring freelancers or contractors, who are already trained with the skills you need. Services such as Elance, Upwork, or oDesk help you search for professionals who work remotely for less than a traditional employee.
Telecommuting - Having employees work from home keeps real estate and utility costs down while employees enjoy shorter commutes and a workstyle that many now expect.
Cloud-based information technology (IT) - Move software and digital files to a virtual environment to eliminate equipment upgrades every few years. This saves IT costs. Remote employees and traveling sales staff will have access to files from multiple locations.
Go green - Print fewer documents and shift to online workflows. It's environmentally friendly, saves money on copy and printing supplies, and eliminates space needed for secure paper document storage.
Automate support systems - Identify new ways to automate or combine support systems. This can be a source of savings. Consider:
- Telecom (VoIP based systems could save up to 50% on equipment costs)
- Office equipment and computers (leasing versus buying could save on future upgrades and monthly carrying costs)
- Human resources (HR) administration (outsourcing to HR providers, or simply converting to an online payroll function [LINK TO ONLINE PAYROLL] can save money and free up employee work hours for other strategic projects)
- Freight/delivery systems (consolidating package and freight service use for better discounts)
Step 3: Preserve productive spending.
Cutting the wrong expenses can cost your business more money than it saves, so protect items essential to generating revenue.
Salaries and commissions - Reducing wages or hours can reduce employee morale, productivity, and performance. Control payroll costs by freezing hiring, limiting overtime or delaying raises and/or bonuses.
Marketing and advertising - Marketing isn’t cheap, but it lays the groundwork for future sales. Rather than cutting advertising, look for lower-cost or self-propelled channels, such as social media.
Safety - Any expense that keeps employees and your workplace safe needs to stay. Use technology to monitor the workplace and safety training to decrease the risk of injury.
Materials - Quality products require quality materials. Cutting corners on supplies can lead to inferior products that harm your company’s reputation. Bid out existing contracts to create competition among vendors for more favorable prices or payment terms.
Research and development (R&D) - Scrutinize R&D but be careful not to sacrifice future innovation and long-term profits.
Step 4: Stay vigilant.
Expense review isn’t a one-time task. Review expenses every month and reward employees who come up with sound cost-cutting measures. Rely on key advisors—CPAs, attorneys, bankers, and colleagues—to help you keep your budget priorities in balance.