Small businesses often work on tight margins.
As a result, startup owners are always on the lookout for growing the revenue to sustain a healthy profit. Profit margin is a simple mathematical equation that depends on two factors: revenue and expense. For achieving higher margins, you have only two choices—either to increase the revenue or to reduce the expenses.
Increasing revenue without overloading the employees or sacrificing the quality of offerings is a difficult task - especially with tight finances and limited resources. The second option, reducing expenses, is far more straightforward. Streamlining your expenses will have a direct impact on your profit margin.
Cost cutting is arguably the easiest way to improve the profitability of your startup venture. Introducing a systematic cost-control method can result in immediate savings. At the same time, it would ensure competitive profit margins in the longer run.
So what are the best ways to reduce operational costs? Let's find out three effective ways to achieve your target without compromising on the quality and performance.
1. Embrace Technology
Take a look at your current administrative processes and identify areas that could be automated using technology, instead of manpower. The business world is changing rapidly and keeping up with the latest advancements by harnessing technology will result in significant reduction of operational costs.
There are several online solutions that can automate various small business functions at a fraction of the cost involved in employing human resources. By automating repetitive tasks, you can save hours of manual efforts every day. Your employees can utilize the time to improve the business productivity. Moreover, machines are not prone to committing mistakes. Thus technology allows businesses to eliminate human errors.
How Technology Can Reduce Operational Cost?
Reduce Payroll Burden
Lower Marketing Costs
Traditional forms of marketing are costly and outdated. You should leverage the power of internet to reach out to millions of users online. As you might already be aware of, there are both free and paid advertising opportunities available online. Instead of hiring a marketing agency, you can make use of free classifieds websites and cheap CPC advertisements to promote your business. Not only it would come out cheaper, but also be more targeted and effective.
Pay Lesser on Office Essentials
Technology can be used to reduce the expenses on office essentials. In this age of Skype and Google Voice, do you really need to pay hefty bills on mobile and landline usages? Similarly, you can embrace technologies like Google Drive or BaseCamp to centralize documents and file storage instead of using paper documents. That's a smart way to get rid of the costs associated with printers and paper-works.
Save on Travel Expenses
Commuting costs and travel allowances contribute a significant percentage of the total operational expenses for any business. You can make a decent saving by organizing meetings and presentations online to get rid of travel expenses. Cisco WebEX can be an excellent utility to conduct meetings, webinars and presentations online. MeetingBurner is another online video conferencing tool that you can use for free.
2. Consider Outsourcing
Strategic outsourcing of secondary business functions is another smart way of reducing operational costs. It will help you to keep your organization slim and trim - reducing payroll costs at the same time. Instead of diverting your focus and efforts in managing non-essential tasks, you can devote the time on revenue-generating activities.
Think about the services that don't need full-time employees. Small IT businesses can outsource hardware support activities instead of hiring full-time hardware engineers. With only a handful of computer systems to manage, you don't need an in-house team of hardware specialists. Computers don't crash every other day. But when it does, you can always take help from a service center in your neighborhood. Besides fixing your computers, they can provide you a number of value-added services including software installation, troubleshooting performance related issues, and periodic system maintenance activities.
For example, let us take into consideration the case of Dave's Computer. Computer repair is the focal point of their business, but they are equally proficient in data recovery, virus and malware protection, and performance tuning. So it does make sense to have tie-ups with external vendors for the services that you don't use often.
What Are the Areas that Could be Outsourced to Reduce Operational Costs?
Preparing tax return is one area where you don't need dedicated employees throughout the year. When you would hardly need them for a month or two, then what's the point in adding a tax professional in your payroll for the entire year? You should better utilize the service of a professional tax agency on a need basis.
Every business deals with customers and customer support is one area that nobody can afford to ignore. Having said that, maintaining a customer support team of your own can be a costly affair. Add to that the cost of recruitment and training. That's why the majority of small businesses prefer to outsource customer support activities to an external vendor.
Today's business world is dominated by computers. It is impossible to imagine a modern business that doesn't rely on computers in one way or the other. Building and maintaining your own IT infrastructure is difficult and expensive. That's precisely the reason behind the booming market for infrastructure-as-a-service (Iaas) providers. In a typical IaaS setup, the service provider owns and maintains the hardware, while you need to pay a small monthly subscription fee to use their infrastructure.
3. Make Smart Hiring Decisions
Another excellent idea is to hire contract professionals instead of full-time employees. There are exceptional professionals in every sector who prefer to work for themselves. Many small businesses are turning to freelancers for getting ad-hoc jobs done and it has revolutionized the way startups compete with established organizations in today's competitive marketplace.
Hiring freelancers and interns can turn out to be a money-saving master-stroke for small businesses. From content writers to graphic designers, and website developers to marketing experts, you can hire them for a specific period of time on a need basis. Contract professionals are hired for as long as it takes to get the job done, and you don't need to pay them when there's no work.
The work gets done and the overhead doesn't get added to your payroll commitments. Isn't it a win-win situation for both the parties concerned?
Freelancing Opportunities that Small Businesses Can Benefit From
Need a copywriter to create engaging content for your new website or looking for someone to draft your weekly newsletters? Have a look at the popular freelance marketplaces like UpWork or Guru, you can find tons of talented copywriters to get the job done at a fraction of the cost involved to employ a full-time copywriter. Freelance copywriters usually charge hourly or per word rate. A rate of around $15 per hour or $0.05 per word will be enough to attract the top quality freelance copywriters.
You can employ a freelance web developer to build your business website. It is a cheaper option compared to appointing a full-time web developer or using the services of a professional web development agency.
Search Engine Optimization
Organic visitors are the driving force behind the success of any online businesses. While large-scale businesses have the budget to build an in-house team of SEO experts, it could be difficult for startups to employ a full-time SEO professional. That's where freelancers come to the picture.
Need a quick flyer designed? Looking for a graphic artist to create the landing page template for a new marketing campaign? For ad-hoc design related tasks, a freelance graphic designer fits the bill perfectly. Fiverr.com and 99designs.com can be your best bet to find an awesome graphic designer for as low as $5 per task.
Reducing the operational costs is a proven practice to gain better margins. But to do that effectively, first and foremost, you need to identify the right areas where it is feasible to reduce overhead. If required, involve your customers and suppliers to evaluate possible areas of improvement. Proper assessment of your profit and loss statement is equally important as you don't want to take any undue risks that can have an adverse impact on the performance of your business.
It is important to remember that there is no 'one-size-fits-all' approach to cutting costs and improving profitability. It varies from one business to another. Something that works for you, might not work for someone else. However, a business with streamlined operating expenses is in a better shape to push for improved margins, so do ensure that you are running a tight ship.