When the credit crunch first hit us last year – followed quickly by the recession – most business owners immediately reviewed their costs and made cut backs.
But you shouldn’t wait for “bad times” to review costs. To ensure your business is always as profitable as it can be, you should be reviewing costs continually.
These days business changes fast. Your market place and customers will give you feedback on the changes they demand quickly enough. So you need to be ready to respond to those changes and review your own suppliers on a regular basis.
It’s easy to cut business costs overnight when you look at the three main cost areas of your business:
1) Review the day-to-day costs of running your business
Just being in business every day costs money, although it doesn’t have to cost a lot.
One of the biggest costs will be renting work space and paying the utilities for it. That’s why the smartest new business owners start up from home, keeping the costs of running their business very low.
Of course that’s not practical if you need customers to visit you; space to store stock, or for staff to work.
In that case you can keep costs low by looking at the unfashionable side of town. The less demand there is for workspace the cheaper it tends to be. Be aware this is not a smart strategy for a retail store which relies on passing traffic… but for any other business it can bring a significant cost saving.
Look at the possibility of sharing space with a friendly non-competing business (make your arrangement formal and legally binding to protect you both). Also consider serviced offices. Although these can work out more expensive in the long-term, you can rent a small space to start with and relocate to a bigger office in the same building later. That’s a good way to keep more cash in your pocket early on.
Every business needs a combination of electricity, telephones, mobile phones and the internet to function and these bills can significantly add up over the year. The good news is there are a lot of suppliers in the market and they all want your business. Lots of supply drives prices down. Use brokers such as Business Energy Switch and uSwitch for Business to find the best deal. Typically, the longer you commit to a supplier the better the deal you will get.
Another way to cut the costs of utilities immediately is to switch things off! Make sure lights, computers and air conditioning are switched off at the end of each day. If staff keep forgetting, then get some cheap timers for power sockets.
You should also shop around to find the best and most relevant business insurance deals. Make sure you are only paying for the insurance you need to protect your business. Quiz brokers about what policies include, and cut out anything you don’t really need.
2) Review the costs of staff
Staff tend to be the highest cost in any growing business. It’s a catch 22 situation: you can’t grow quickly without staff, and you need to grow to pay them!
In general, it’s wrong to penny pinch with your team. Saving a few quid on the Christmas party may give your business bank account a small boost, but can cause a lot of unseen damage. Employees can react badly if they feel they are working hard just to line your pockets!
The right way to reduce costs with staff is not to make cuts – but actually to spend more money. You should reward staff for good performance. So pay them a good basic, and give them the chance to earn an uncapped bonus depending on how they perform.
This bonus should be linked to sales and profits, plus something that each member of staff can directly affect in the business. You will be quite happy to give an extra £1,000 to a member of your team if they have directly generated £20,000 of revenue.
There are some other staff costs that can be reviewed. If you provide staff with a mobile phone, place all handsets under a single business tariff. This will allow you to “share” minutes and texts among a number of handsets.
And the one area where you can afford to be tight is with staff business expenses. Don’t be afraid to challenge expense claims if they look exaggerated! Employees tend not to pick the most cost-effective way of travelling. Ask them to keep costs low by sharing transport and using cheaper train fares, for example. When you explain that costs saved can mean more bonus in their pocket, that tends to be a good motivator.
Other expenses that can accumulate over time are office sundries such as stationery. Put one person in strict control of this and give them a tight budget to stick to. Supermarket stationery can often work out cheaper than the big stationery stores.
3) Review the cost of raw materials
The final area to review is the cost of the materials that you turn into the product or service you sell. And here you need to strike a balance between a healthy relationship with your supplier and getting the best price.
Typically, the more you buy the more power you have. This means you will benefit from buying in bulk or committing to a supplier with a long-term contract.
As part of the buying process, look to negotiate on the shipping or posting costs, or arrange these yourself using local couriers who can give you a better price. You could even source local suppliers as you can pick up products yourself rather than pay delivery costs.
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