Managing costs effectively is critical for small business success and sustainability. With tight profit margins across most industries, unexpected expenses can quickly eat into the bottom line of many small companies. By identifying specific ways to reduce operating costs and streamline expenses, small business owners can protect and boost profitability even during challenging economic times. This allows them to reinvest funds into growth initiatives that support the overall health of their business.
- Identify and analyse all fixed and variable expenses to reveal the best opportunities to reduce operating costs. This includes conducting cost audits and implementing expense tracking.
- Proactively cut controllable fixed costs by renegotiating contracts, optimising office space, and improving inventory management.
- Streamline variable costs through supplier negotiations, technology investments, energy efficiency measures, and targeted policies around employee benefits, travel, and marketing.
Identifying and analysing managing costs
The first step for small businesses looking to reduce costs is to gain complete visibility into where their money is currently going and what their largest expenses are. There are two major categories to focus on:
Categorise operating expenses
Classify all expenses as either fixed or variable costs:
- Fixed costs remain fairly consistent every month – these include expenses like rent, insurance, loan payments, software subscriptions, equipment leases, and contractual service fees.
- Variable costs fluctuate based on production volume or sales activity – examples include raw materials, inventory, shipping & delivery fees, merchant processing fees, hourly labour costs, utilities, and travel expenses.
Conduct a cost audit
Thoroughly review 3-6 months of financial statements and accounting records. Analyse historical spending patterns across all expense categories to identify trends, seasonal fluctuations, anomalies, and areas with the greatest potential for reduction.
Track and monitor expenses
Implement centralised expense tracking tied to accounting software. Regularly monitor this data with KPI dashboards to spot spending outliers and concerning trends as they arise. This allows for immediate intervention when budgets start to veer off course.
Many fixed costs are dictated by existing multi-year contracts. Review all service provider agreements – including office space leases, equipment rental contracts, maintenance & service contracts, SaaS/subscription agreements, insurance policies and merchant processing terms. Then contact each vendor to discuss discounts, payment restructuring, or early termination options that reduce monthly costs.
Evaluate office space needs
Take an honest look at whether current office space or warehouse footprints can be downsized based on actual need. Consider restructuring leases to shorter terms or lower cost coworking rental arrangements. Also assess opportunities to sublet unused space at pure profit.
Optimise inventory management
Examine current inventory management strategies around raw material orders, WIP, and finished goods to identify more cost-effective alternatives that reduce carrying costs. Consider implementing Just-in-Time ordering processes to cut down on storage fees, obsolete materials, and tied-up cash flow.
Reducing variable costs
While many variable expenses are directly correlated with sales volume, implementing targeted cost reduction initiatives can still drive significant savings.
Negotiate with suppliers
Routinely shop around and negotiate with suppliers to secure better deals on recurring supplies/materials, contract manufacturing, and supporting services related to operations. Loyalty rarely pays dividends in the form of preferential pricing.
Actively seek ways to utilise software automation, AI, machine learning, and process improvement strategies to optimise workflows, reduce reliance on labour, speed throughput, eliminate errors, and leverage outsourcing partnerships. The savings from even minor productivity/efficiency gains compound rapidly.
Implement energy efficiency measures
Evaluate production processes, office spaces, warehouses, company vehicles, and other operations for implementing sensible energy conservation initiatives. Simple tactics like LED lighting, smart climate controls, and scheduled power-down policies quickly yield utility bill cost savings.
Additional cost-cutting strategies
Beyond directly controllable operating costs, there are other areas small business should review from a cost optimisation perspective:
Employee benefits optimisation
Review employee benefits plans to find the right balance between value for staff and cost for the business. Consider adjusting subsidies, consolidating policies, varying coverage tiers, and providing resources to help employees choose the most cost-effective options. The goal is providing quality benefits while optimising spending.
Travel cost reduction
Consider restricting travel policies to necessity-only onsite meetings, enacting travel budget caps, emphasising virtual conferencing systems for both internal and external collaboration, encouraging public transport over rideshares/taxis and allowing hotel room sharing. Additionally, leveraging a business rewards credit card like Capital on Tap, which allows the conversion of accrued points to cashback or redeeming them for Avios, could effectively offset future travel expenses.
Marketing cost management
Seek lower cost marketing alternatives that provide sufficient exposure without breaking budgets. Consider reallocating funds from traditional channels like print, radio, sponsorships, etc. to lower cost digital platforms like social media marketing, content marketing, and cost-per-click search campaigns. Require thorough attribution reporting to guarantee optimal ROI on every marketing pound spent.
The bottom line
Cutting costs takes work upfront, but pays off in the long run by boosting profits. Focus first on reducing fixed expenses by renegotiating contracts, rightsizing office space, and optimising inventory. Also streamline variable costs through supplier negotiations, technology, and energy efficiency. Additionally, look at employee benefits, travel policies, and marketing channels.
A sustained focus on cost reduction can transform a struggling small business into a thriving one by improving the bottom line. While difficult, cutting expenses frees up money to fuel growth and success.