Whether you want to improve profitability or your small business is having cash flow problems, slashing expenses is an immediate and effective solution. Cost cutting is a priority in many situations, including times of high inflation, crowded marketplaces, tough financial times, and when executing a business growth plan.
However, deciding where to cut expenses without negatively impacting revenue or operations is challenging. We’ll look at cost cutting and how to reduce expenses while maintaining a smooth workflow and a full staff.
In business, you can increase your net income by boosting revenue or reducing expenses. You can raise revenue by increasing the prices of goods and services you already sell or by adding new goods and services to create additional sales.
If the time isn’t right to raise prices or add new products, reducing expenses is the best way to increase your cash flow. Cutting expenses in business usually means reducing the overhead costs you spend to run everyday operations and provide goods or services to your customers.
Net income and profit are often confused but they actually refer to different things. Net income is typically seen as a company’s bottom line, while profit is the total revenue after deducting business expenses.
The challenge for many businesses is finding ways to cut costs without decreasing output, lowering product quality, or asking individual employees to take on an unreasonable amount of work. Cutting costs without cutting staff poses even greater challenges for many struggling small businesses.
In some cases, the benefits of cutting costs may outweigh the downsides, especially if it keeps you in business. However, there are many ways to reduce expenses that you can try before you decide it’s time to let employees go.
If you’ve been working with the same supply chain for years, you may be missing out on excellent bargains. While researching new vendors and wholesalers takes time, the cost savings can be enormous if you’re not currently paying the best prices for products and services.
Additionally, if your market or niche has grown while you’ve been in business, you may find many more vendor options than when you initially opened your doors.
If you’re a longtime customer, you can also approach current vendors about renegotiating your contract. If they don’t want to lose an account, they may be willing to offer discounts or add-ons that save you significant money.
Relocating to a smaller office space may save you money on rent (though you’ll be on the hook for office relocation expenses). But if you run a small business or your company has locations in multiple cities, paying for an entire office space may not be economical.
Coworking spaces are excellent options for salespeople, managers who travel regularly, or entire businesses if a small team runs them. Coworking spaces are also an option if many employees work from home. All you’re paying for is a desk and amenities, thus slashing your administrative costs.
Optix and Deskpass are examples of open-desk platforms that let you rent a place to work, often for less than $100 a month.
Small business owners may feel they must compete with large companies by offering benefits and extra amenities. While offering creative perks is a nice way to treat your staff, most employees most likely appreciate comprehensive employee benefits and paid time off (PTO) policies more.
For example, if you’re spending $2,000 every December on a holiday party for your staff, consider skipping the festivities and giving everyone a small bonus instead. If you have a relatively small team, you’ll spend less, and your workers will enjoy more time with their friends and family.
If executive staff members receive exclusive perks, such as concierge service or gym membership, consider reducing expenses by cutting those perks and offering them the same benefits as other employees. Eliminating exclusive perks will save money and create a sense of equality between workers and managers at different levels in the company.
If you haven’t analyzed your marketing mix recently, you may find that you can reduce your expenses significantly. Calculate how much you spend on various forms of marketing:
Look for areas where you invest significant money or staff hours that aren’t producing results. Once you identify wasteful marketing efforts, brainstorm ways to replace those elements with less expensive forms of marketing. For example, can you take out ads in popular trade magazines instead of traveling to trade shows? Additionally, investing in an online course to learn about social media marketing, email marketing, and mobile marketing may be more cost-effective than your current marketing efforts.
While you should streamline and update your marketing mix regularly, it’s particularly helpful to make changes when trying to cut costs and use your budget as effectively as possible. Effective marketing reduces wasted money while allowing you to reallocate savings to campaigns that will produce more revenue.
If you’re operating on a shoestring budget, you could choose an outsourcing partner to help boost your business’s growth. For example, you could hire a freelance designer to create a logo or a YouTube personality to promote your products for very reasonable prices.
You can also outsource small or time-consuming tasks to freelancers, such as virtual assistants or copywriters. Outsourcing lets you focus time and energy on your business’s core activities without the expense of hiring a full-time employee.
Additionally, many technology resources can eliminate the need to pay an employee or contractor. Consider the following options:
You can often get close to professional quality at significant cost savings if you’re willing to invest a little time and money in learning a new skill. You can also consult your employees, friends, and family to see if they have any particular skills or expertise they could lend your business.
If your company is struggling financially, reducing expenses may be necessary to stay in business. However, even if your company is financially stable, cutting business costs provides multiple benefits, including the following:
Whenever you reduce operational costs, you have more money to put back into your business, creating more opportunities for future growth.
Cutting costs should be more than just a periodic exercise to improve your bottom line. It’s a key practice to stand out in a marketplace of countless innovations, apps, and websites disrupting how people do business.
Thinking outside the box will help you lower your overhead and compete in a crowded market. It will also reduce the likelihood that you’ll run into trouble with cash flow in the future.
At least once a quarter, take time to evaluate your budget and look for ways to reduce expenses for your business.
Jennifer Dublino contributed to the reporting and writing in this article.