How to cut costs as a small business
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Posted: Wed 31st Jan 2024
The success of any business, big or small, depends on its ability to manage costs. As a small business owner, you may face challenges in cutting costs while still providing high-quality goods and services. But there are many ways to reduce costs without sacrificing your level of service.
The current cost of living crisis is affecting consumers' spending power. When the cost of living increases, consumers have less disposable income, which lowers demand for the goods and services you offer as a small businesses.
On top of that, your business is having to tackle the rising costs of rent, utilities, raw materials and taxes, which can eat into your profits and make it difficult for you to stay afloat. That can mean having to increase prices, which can further reduce demand and lead to a vicious cycle of declining sales and profitability.
In this blog, we explore how to cut costs as a small business and restore your bottom line. You'll be amazed at the innovative solutions that can help you save money without hurting your company's reputation or putting all your hard work in jeopardy.
What is a business cost?
Let's take a moment to define "costs". A business cost is any expense you run up in the course of selling your products or services.
For example, it might be the money you spend on buying ingredients, employees' salaries, or the rent you pay for your premises.
Fixed costs
These are essential expenses that remain the same regardless of how much you're producing or selling. Examples of fixed costs include:
rent
staff costs (salaries)
insurance premiums
property taxes
loan payments
maintenance costs for equipment
Usually, you pay them on a regular basis, such as every month or every year.
Fixed costs are an essential part of any business budget and you must manage them carefully to make sure your business stays profitable. It's vital that you keep track of these costs, as they can quickly add up and eat into the profits you're able to generate.
Variable costs
These are expenses that vary depending on your level of output or how much you sell. Examples include:
raw materials
wages for hourly employees
transport costs associated with delivering products to customers
Variable costs are often called "direct costs" since they can be directly attributed to the production of goods or services. By understanding how these costs change as production increases or decreases, you can better understand your cost structure and make more informed decisions about pricing your products and services.
By monitoring variable cost trends over time, you can plan effectively for future spending and ensure you remain competitive in your market.
Ways to cut costs as a small business
Analyse whether you're operating efficiently
Tracking your operational efficiency is critical in reducing costs. By monitoring how long tasks take, what you use in resources, and which processes are more successful than others, you can gain valuable insight into where you can make improvements.
Not only that, but having accurate data can help you identify areas where you may be overspending or where there's potential for making savings.
The best way to start tracking your efficiency is by using software such as a project management system (for example, Trello, Asana, Basecamp or Monday.com) or an analytics platform like Google Analytics.
You could also create reports and dashboards that track key performance indicators (KPIs) such as customer satisfaction ratings or production times.
With this data to hand, you'll be able to make informed decisions about how to cut costs and make your business more efficient.
Develop a budget, if you don't already have one
Creating a business budget – and keeping to it! – is an effective way to reduce costs in your small business. A budget allows you to identify unnecessary expenses and make adjustments accordingly.
It also helps you plan for future costs and investments, so that you can make sure you're spending your money in the right places.
To create a budget, start by tracking all of your income and expenses for a month or quarter. This will give you an idea of how much money is coming in and going out each month. Once you have this data, decide on a budget for each department or category of expenses.
Make sure to include both fixed and variable costs (see Fixed costs and Variable costs above), as well as any long-term investments or one-time purchases.
Once you've created your budget, you must stick to it! Regularly review your spending against the budget to make sure you're staying on track. By creating and sticking to a business budget, you can ensure that every penny is being allocated in the right places.
VIDEO: Tips on creating an efficient budget
Discover why it's important to pay yourself properly, understand your expenses and learn to treat your budget as a living entity:
Invest in staff to keep them productive
Your employees (if you have them) are the lifeblood of your small business, and giving them the support they need is key to their success.
From implementing training and development programmes to organising team-building activities and developing a flexible work culture, there are plenty of ways to create an environment where employees can thrive without breaking the bank.
Investing in staff morale is not only good for motivation and productivity but also helps you retain talent in the long run – saving you time and money on recruitment costs.
Decide whether to outsource work or bring it in-house
Outsourcing
Hiring freelancers or contractors to do certain jobs for you can be a great way to reduce costs without sacrificing quality. Not only does it save you money on salaries, but it also allows you to access the best talent for specific tasks in an efficient and cost-effective manner.
Freelancers are experienced professionals who are skilled at specific tasks, meaning you won't have to pay for the overhead of full-time employees. Plus, freelancers usually charge by the hour or project, so you only pay for what you need.
That said, it's important to research potential freelancers thoroughly and find one whose skillset best matches your needs. Don't just go with the cheapest option; consider their past work and reviews before making a decision.
Websites like Upwork and Fiverr provide an easy platform to find qualified professionals who will turn out high-quality work – from writers, web developers and graphic designers to virtual assistants. Outsourcing certain tasks can help free up your team's time so they can focus on more important projects.
Bringing work in-house
Sometimes, hiring several freelancers or outsourcing a number of projects can be more expensive than hiring one full-time or part-time employee to take care of the same tasks.
By bringing work in-house, you can not only save on costs but help foster a sense of teamwork and an environment of collaboration among your existing staff. Review your current budget and see if it would be more cost-effective to bring certain tasks in-house.
VIDEO: Outsourcing vs. in-house
Running a business alone is really difficult, and help can be invaluable. Get tips on what to outsource and what to do yourself:
Review your suppliers
It's easy to forget about the suppliers your small business relies on. You sign a contract and then you don't think about it again for months or even years. However, if you take the time to review your suppliers regularly, you can save a significant amount of money.
Negotiate better deals on services such as mobile phones, broadband and other utilities that you use every day. Ask for discounts on products or services you buy often and make sure your current provider is giving you the best rates available.
Also, look into the possibility of consolidating several suppliers into one who offers volume discounts. If done right, reviewing your suppliers could lead to major savings that will help keep your business running efficiently and profitably.
Pay close attention to the small details
There are many smaller changes that you can implement to reduce expenses. Small measures such as using energy-efficient LED lighting and recycling materials can help you save money over time.
Additionally, spending on everyday items such as office supplies and coffee can add up quickly if not tracked. Consider setting spending limits for each department to make sure that all employees are conscious of their spending and taking advantage of discounts or bulk purchases when they become available.
Consider how much you're spending on premises
When it comes to reducing costs, you should pay particular attention to your premises. They are often the biggest overhead for businesses, so taking the time to negotiate well or move at the right time can save you a fortune in rent.
Cutting down on office space can be a wise cost-saving strategy, especially now remote work is becoming more popular. By reducing the amount of physical office space needed, you save money on rent, utilities and supplies.
Moving to a smaller office or premises, or taking up a coworking space, can lead to more collaboration and creativity among employees, as they work closely together in a more compact environment.
However, it's important to consider the potential downsides, such as reduced privacy and lack of dedicated workspaces, before making any drastic changes to your set-up.
Negotiating business rates with your landlord could save you a considerable amount of money. Before you do, though, make sure you have a solid understanding of the current market and your business's needs.
Have data to support your case, such as current market rates, your business revenue, and any improvements or upgrades you've made to the property. Open communication and a willingness to compromise can lead to a mutually beneficial agreement for both parties.
Travel less and think about working remotely
In today's digital world, it's easy to forget that travel is often a significant business expense. For small businesses, physical meetings may not always be needed, yet the costs of holding them can add up hugely over time.
By cutting back on unnecessary meetings or trips, you can make a major impact on your bottom line and free up resources for other investments.
Work out how much money you're dedicating to business travel expenses. Setting limits on what you deem acceptable spending can help cut back on unneeded expenditure that you could use elsewhere in your company.
When travelling for work, also look for ways to save money – that might be using public transport rather than renting cars, or staying in cheaper hotels.
Technology has made it easier than ever to stay connected with clients, customers and colleagues without needing to travel at all. Consider using video conferencing tools like Zoom, Google Meet or Microsoft Teams for virtual office meetings and collaborations instead of booking flights or renting cars.
You can also host webinars remotely or use screen-sharing technology to demonstrate products or services effectively without needing to leave your physical space.
Reduce how much energy and paper you use
Using less energy not only saves you money on utility bills but benefits the environment too. There are several ways to do this, such as:
switching to energy-efficient light bulbs
investing in energy-efficient appliances and equipment
implementing energy-saving practices like turning off lights and electronics when not in use
By lowering your energy consumption, you can also improve your business's reputation and attract customers who value environmental sustainability.
Reducing the amount of paper you use is also important, in that it saves you money on copying and printing costs. By using digital documents and tools like email and cloud storage, you use much less paper and help to create a more sustainable workplace.
Read more:
Review your software subscriptions and change plans or cancel
If you use online tools or software that require a paid subscription, identify which of these are essential and which you aren't fully using. With the latter, you can downgrade them, cancel them altogether or consider using free, open-source software.
Continuously monitor your software expenses to make sure you're not paying for subscriptions that you no longer need or never use. And don't be afraid of negotiating with your software vendors to get the best deal possible.
Read more:
How will cutting costs benefit my business?
Reducing costs is essential if you're going to remain competitive and profitable. By cutting back on unnecessary or excessive spending, you can free up resources to reinvest in more important areas, such as marketing and product development.
Cutting costs also helps you maintain a healthy cash flow and keep your operations running smoothly. It also allows you to increase your profits by lowering overhead expenses.
Once you've done that, you can focus on other aspects of your business that work to improve customer satisfaction and grow the company over time.
How do I know if my business needs to cut costs?
As you run your business, you'll be keeping an eye on expenses. If you're noticing that your cash flow is going down or you have no revenue to buy new products, this is a sign that your business may need to cut its operating costs.
Also, if you're having difficulty making payments on time or paying suppliers and employees, these may be indications of financial trouble.
It's also beneficial to track your spending patterns and look for areas in which you can lower your costs. For example, if you find yourself frequently buying expensive items or using outdated technology, it could be worth looking into more cost-effective options.
Ultimately, it's important to monitor your expenses and take proactive steps to reduce costs when necessary to keep your small business profitable and successful.
How do I decide which costs to cut?
You must first understand where your money is going. Analyse your income and expenses to get a better view of where you can make cuts.
It's also important to consider the short-term and long-term effects of any cost-cutting measures you take. For example, while laying off staff could save money in the short term, it may negatively affect productivity and customer service in the long run.
Look for areas in which you can reduce overhead costs such as travel expenses or office supplies. And see which services or tasks you might be able to outsource rather than pay for an employee's salary.
Does cutting costs mean losing staff?
Reducing your operational costs without cutting staff is tricky, but it can be done. The key is to focus on lowering overheads and finding ways to become more efficient with your existing staff.
For example, look for tasks that you could automate or outsource to free up employees' time and make sure you're using them in the most effective way. You can also investigate ways to streamline processes, such as introducing an online scheduling system or using software to automate manual tasks.
Consider offering flexible working hours or remote options that could reduce overheads like rent and energy bills. But don't forget about training programmes and team-building exercises that can help keep morale high and ensure a productive work environment.
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