While you may be tempted to start eliminating every business item that’s costing you money, business experts recommend taking a measured approach. Consider small cost-saving methods first, while eliminating inefficient processes and wasteful spending.
At crunch, many business owners begin cutting staff and inventory. Neither is a good idea. Cutting personnel may reduce customer service, while cutting inventory may create unsatisfied customers.
You also may be tempted to eliminate marketing or advertising costs, which will provide immediate relief. On the other hand, advertising or marketing that produces paying customers and brings in more than it costs is not an expense, it’s an investment.
Such marketing “investments” include business cards, letterhead and envelopes, which should belong under advertising expenses rather than office expenses. Business writer Tom Egelhoff says those items still cost money, but contribute to an increase in sales. True office expenses such like staples and paper clips rarely increase the bottom line, he says.
So what can you do? Here are some basic steps that can go a long way in reducing the red ink.
Eliminate writing checks by using a business credit card or Automated Clearing House (ACH) payments. Emailing invoices and accepting credit card or ACH payments can eliminate the paper and postage costs of mailing bills. Electronic billing also saves time and effort, reduces labor expenses and accelerates cash flow.
And while credit cards do carry a fee, they also offer the security of guaranteed funds, unlike checks.
Consolidate your vendors
Moving your company’s business to a single supplier or service vendor offers greater efficiency than using multiple vendors. Using a single vendor could result in discounts on some services, thus saving you money.
In the case of print and mailing house services, for instance, a single vendor can reduce expenses, particularly if you renegotiate prices frequently. Get vendors to compete for your business and let them know you’re soliciting bids from others. This will help ensure you get the best prices.
Consolidating supply and service vendors makes standardizing contracting processes possible, allowing you to eliminate redundancy and overcharging. Some communities feature local buying organizations that gather all the local businesses in the area and use their collective buying power on behalf of all the members.
Egelhoff advises making an annual or semi-annual review of all your key vendors standard practice in your company. Also, make sure you flag all automatically renewing contracts to pop up for review and rebidding 60 to 90 days before their expiration date.
Practice fiscal discipline
This goes for you as the owner and your employees. Making smart and frugal choices will let your team know that excessive spending is not okay, while inducing them to help keep expenses in check.
Don’t use company funds for your personal expenses, even those related to work. If you have a huge office with expensive furniture, tone it down. You may be sending the wrong message to your employees.
Also, encourage your team to submit cost-cutting ideas and recognize them at staff meetings when they do. Egelhoff notes that Walmart’s innovation of having someone greet shoppers at the entrance was an employee suggestion.
Expenses are either fixed or variable. Fixed expenses, which do not fluctuate with changes in production level or sales volume, include rent, taxes, insurance, dues and subscriptions, equipment leases, payments on loans, depreciation, etc.
These fixed expenses can be reduced through negotiation, such as altering the length of a lease or adjusting buyout costs at the end of the lease. Insurance costs may be reduced by adhering to safety directives and practices and changing the type of coverage.
Improving efficiency has long-lasting benefits beyond reducing costs because it can also help the company run more productively and deliver better service to customers. Efficient operations can reduce such items as raw materials, packaging, and labor directly involved in a company’s manufacturing process.
Variable expenses can change radically from month to month, rising and falling with sales. Large payments that seemed doable when the order was placed may suddenly create a drain on resources.
Talk to your banker
Your banker can show you techniques to help manage cash flow and streamline the payment process. He or she can offer guidance on controlling expenses, share methods for freeing up cash to grow your company, and show you how to offset some of the rising costs that come with any growing business.
Your banker is also a good source for industry trends and best practices learned from other clients.
With proper planning and commitment, you should be able to reduce your business expenses and keep them in check.