All successful businesses have one thing in common: they monitor their expenses very closely. A little bit of prudence can go a long way when it comes to spending. When inflation rises, you can control costs and conserve cash––and keeping expenses down could be a lifesaver in a recession.
Why businesses cut spending
Of course, the most important reason to cut expenses is to boost profitability. A cash-rich company has the resources to fund expansion into new markets or make big business investments. On the other hand, a business strapped for cash would need to spend time raising money, leading to a lack of focus on its core business.
In this post, we’ll tell you five things small business owners can do to cut down on expenses.
1. Eliminate non-essential spending
Take a long, hard look at every business expense you’ve incurred in the last three or six months. Was every expense necessary? Would your business suffer if you eliminate or cut down on some of them?
Most organizations have plenty of opportunities to bring down their discretionary spending. Here’s a quick list of low-hanging fruit to keep in mind:
- Memberships and subscriptions: Check if there are any you pay for but don’t use. This could include access to online tools or platforms that your team no longer needs.
- Banking fees: These can eat away at your bottom line. Although the individual amounts may be low, the total can add up to a tidy sum over a period. Fortunately, there are ways to avoid hidden checking account fees and other charges that you could be paying.
- Travel costs: For some firms, this is a significant expense. It’s a good idea to have a written corporate travel policy.
- Insurance costs: See if you can bring premiums down by agreeing to raise your deductibles. You could also consider doing away with unnecessary coverage.
A word of caution is warranted here. In your enthusiasm to reduce expenses, make sure you continue to spend on things that contribute to your business. It’s important to maintain your “good” expenses like for product quality, customer service, and marketing.
2. Create an expense budget and monitor it regularly
Make a budget or a financial forecast for your small business. It’s an essential activity that will help you monitor your company’s expenses. Don’t worry if the numbers you plug in prove to be inaccurate. The idea is to make a plan and use it to track your performance.
Think about adopting zero-based budgeting. It’s a technique that requires you to develop a budget from scratch every time you make one. In other words, you don’t use last year’s numbers as a starting point. If you follow this method, you’re more likely to be able to identify unnecessary expenses.
Remember to differentiate between fixed and variable costs when you’re working on your budget. The former expenses stay the same from month to month. Expenses like rent, salaries, and insurance payments fall into this category.
Variable costs can change every month. You would spend different amounts on raw materials, office supplies, and delivery costs from month to month.
It’s easier to bring down variable costs. Fixed expenses are more difficult to control, but if you plan ahead, you can bring these down too.
3. Consider outsourcing some functions
Outsourcing can be a big money saver. According to a recent survey, 35 percent of small businesses have been outsourcing certain business functions for 1-2 years.
Why should you outsource? The greatest advantage is flexibility. You can gain access to people with the required skills and experience at short notice. And if business conditions change, it’s easy to cancel the outsourcing contract.
You should keep in mind that developing some types of expertise inhouse can be both time-consuming and expensive. It’s far better to outsource and leave the work to professionals.
Which tasks should you outsource? The U.S. Small Business Administration, a government agency that supports entrepreneurs and small businesses, recommends several functions that are easy to outsource. Among these are:
- IT management
- Administrative tasks
- Customer service
Although outsourcing can be a boon, use it carefully. Choose vendors after carrying out thorough due diligence and ensure they understand and implement your policies and practices. Additionally, carry out regular reviews of their performance and closely watch how they handle the tasks allotted to them.
4. Ask your employees for suggestions
This is one of the most effective techniques for finding ways to reduce expenses in a small business. Your employees are the people who know your company best. They are ideally positioned to tell you how you can cut down costs.
All you have to do is ask.
Charles Martin, author of Employee Suggestion Systems: Boosting Productivity and Profits, says, “Companies that set up effective suggestion systems are finding that employees have great ideas that can lower costs, increase revenues, improve efficiency, or produce greater quality.”
When building your suggestion system, ensure that you act upon the ideas you receive. If you ignore the suggestions that are put up or fail to implement them, your program is likely to collapse.
5. Negotiate, negotiate, negotiate
When buying things for your company, you must ask for a discount. While it may not be practical to haggle with every one of your vendors, make it a point to negotiate when you think it’s possible to get a lower price.
The first step is to do your homework. Research the market and find out how much similar products cost. Can you get a better price if you agree to pay cash upfront? Will the vendor provide you with a discount if you promise to refer other customers?
The most crucial point to remember is to get competitive bids from different vendors. This is especially applicable for high-value purchases.
Reducing short-term expenses for long-term gains
One of the primary goals of a business is to generate profits. Monitoring costs and cutting unnecessary expenses can help you achieve this goal. But when devising a cost reduction strategy for your company, don’t lose sight of the big picture.
Remember that eliminating “good” costs can backfire.
So, go right ahead and put an end to wasteful expenditure. However, it may be wise to use some of the money you save in a way that helps ensure your company’s long-term success.