REDUCING YOUR COSTS TO IMPROVE PROFITABILITY
HOW TO REDUCE YOUR COSTS
Cutting costs is arguably the quickest and easiest way to improve the profitability of your business. Introducing a cost-control system can bring immediate savings and ensure that you remain competitive in the longer term.
SYSTEMATIC COST CONTROL
Start by identifying your major cost centers. These may be purchasing, production, sales and marketing, finance and administration. Assess your profit and loss statement for the last six months and rank all your expenses from highest to lowest then start working your way down, identifying areas where you could save costs.
Focus on applying cost-saving tactics in areas where you’ll see the most reward, for example:
COMPARING ACTUAL COSTS WITH BUDGETS
Record your actual costs and compare them with the amount allocated in your budget. Try to work out why there is a discrepancy between what you planned to spend and what you actually spend. The larger the cost overrun, the more scope there should be for savings.
Actual costs that are higher than your budgeted costs usually indicate room to reduce costs. Lower costs may indicate good management, but might also reflect a drop in quality or potential problems.
A spreadsheet is an easy way to record and compare costs on a regular basis, such as monthly. Periodically review what you’re doing and how you’re doing it.
Bench-marking your business against other similar businesses may show that your performance is sub-standard. For example, your wastage levels might be higher than the industry average. This is an opportunity to implement cost-saving solutions and to set goals.
WHO SHOULD BE INVOLVED?
If possible make each cost the responsibility of one person or manager. Some costs will be easier to control if one person is responsible for that cost throughout the business. Get your employees involved in cost control. Give them an incentive to suggest cost-saving ideas and ask what causes them problems or wastes their time.
Employees are more likely to co-operate with cost-control initiatives if you explain the reasons for changes and they understand the benefits to the business.
Include your customers and suppliers. Once suppliers are aware you’re watching costs, they may start sharpening their pencils, especially if they know the other purchasing options available to you.
Talk to your customers as you may be able to save costs by eliminating unnecessary features or frills.
SOME EASY SAVINGS
There are some costs that can be reduced with little risk of an adverse impact on quality and performance. Some quick savings are:
OTHER SAVING OPPORTUNITIES
Taking a systematic approach to all your costs should highlight other opportunities to control costs. In many cases, reducing costs will require you to change the way you do things but be aware of the potential to risk to your core business activities:
Reducing costs can have a negative effect so before you make any changes, check that your standards will not be compromised, and that your ability to meet objectives will not be harmed.
Almost every cost saving has a potential downside. For example:
YOUR EMPLOYEE COSTS
Reducing costs when it will directly impact on employees is a difficult challenge. For instance, reducing training and meeting times is often counterproductive in the long-term.
Poor work conditions, pay and benefits will also not attract and retain quality employees and will de-motivate employees who do stay. Changing an existing employee’s terms and conditions to the employee’s detriment, can be a breach of your legal obligations as an employer, so get expert advice first. It may also damage long-term morale. On the other hand, introducing improved procedures can be difficult and expensive. Employees may be resistant to change and may need extra training.
SPEAK TO YOUR ADVISERS
Finally, remember to include your business advisers, such as your CFCL Business Adviser and/ or your accountant in your cost-control program.
CFCL Business Advisers typically deal with many businesses and are in a strong position to help you identify and monitor ‘cost culprits’ and suggest ways to lower costs and improve business profits.