Optimizing business profits is a top priority for every business. To achieve this, businesses either increase revenue and sales profits or reduce operating costs.
Because cost cutting often seems like an easier and more accessible way to increase profits, managers are often quick to choose this method.
So which costs should be cut, and how should they be cut effectively?
Unscientific cost-cutting measures can reduce a business's productivity and, consequently, its profits. While reducing any specific operating expense will generally boost short-term profits, it can also impact long-term profitability. For example, a business cutting advertising costs might see an improvement in short-term profits, as they are spending less on operating expenses. However, by reducing advertising, the business may also decrease its ability to generate new revenue, and future profits could be affected.
Ideally, businesses should aim to keep operating costs as low as possible while maintaining the ability to increase sales. To achieve this, managers need a thorough understanding of operating costs and how to manage them effectively.
1. Application of technology
There are many online systems and software programs that can automate and streamline your business operations. These systems can cover a range of departments, including accounting, payroll, marketing communications, customer interaction and relationship management, service quality control and customer care, sales forecasting and operating budgeting, etc.
Technology is very useful because it promotes efficiency. The result of this efficiency is reduced operating costs in areas where traditional managers habitually rely on direct labor. Technology operates faster than humans with fewer errors. Technology can also improve the efficiency of supply chain processes, seeking to reduce things like the cost of transporting raw materials.
To choose the right technology or software service for you, ask yourself the following questions:
- What am I good at? And what am I not good at? For example, if you have accounting knowledge and background, you might not need accounting and financial technology right away; you might need marketing technology instead. There's a crucial point here: you tend to invest in technology that you already possess. For instance, if you have a strong accounting and financial background, you might invest heavily in accounting and financial management technology because it feels easy, whereas you should prioritize investing in your weakest area to balance your business's strengths, such as automated marketing communication technology.
- What makes me feel like I spend too much time on something each week?
- If I could eliminate one of my most time-consuming tasks, what would it be?
Your answers to these questions will give you a clear indication of the task or subject area where you should utilize the technology.
2. Outsourcing
Another option to improve efficiency is to outsource certain business activities to a third-party professional. For example, if you lack a background in accounting or tax law, you might find it difficult to determine how to manage your finances, or how to reduce your tax liabilities. A professional clearly trained in this area can assist you.
Although it might seem like outsourcing a service would lead to higher costs, in the long run, delegating specific tasks to experts in that field will save you money and produce better results. This is because you can't train experts yourself, nor can you afford to hire a true expert, and only experts can advise you on the best practices in each area.
Outsourcing certain activities is an investment that will gradually pay you dividends over time.
3. Look for better prices for the same product or service.
If you work with suppliers regularly, you might want to set up a bid evaluation system for your purchases. If you ask different suppliers to provide you with price quotes, you'll be able to choose the best price.
Make sure you define the full product/service specifications and the precise scope of work when requesting quotes from suppliers for bidding, as missing information about your requirements or adding or removing complexity will significantly alter the price.
Having an accurate quote can allow you to better plan for your projected operating costs.
4. Change the way you communicate in the business.
Renting office space, paying for office utilities, and managing a physical office can be a significant drain on your finances. Consider allowing your team to work remotely as a way to reduce overall costs.
With the number of connections available today, the difference between an employee sitting in an office and one sitting at home is almost imperceptible. Employees will often find this advantageous, as they can cut down on their commuting time and expenses.
To determine the cost and time involved in face-to-face physical interaction, do the following two things:
- Calculate the time your staff spends preparing and traveling for a face-to-face meeting; sometimes you'll find that a meeting will take you and your team at least 1 to 2 hours for preparation and travel, and also incur a significant cost.
- Create a list of activities that can be communicated via video call without needing to "see the physical partner," then increase online communication from 10% > 20% > 30% ... 50% while maintaining or even improving your work performance. The success of this approach will surprise you with its effectiveness.
5. Identify areas within the business that are underperforming.
You should always be looking for ways to make your business more efficient. By streamlining your processes and procedures, you can reduce waste in both money and time.
Encourage your employees to identify inefficiencies and suggest solutions to problems. Consider providing an incentive for employees to do so. Again, you can think of this as an investment in your company. A small reward for an employee could ultimately save you hundreds of millions of dollars.
6. Cancel unused services.
Review your variable billing statement and identify any services you no longer use. If you haven't used them in a few months, look for a cheaper plan or consider canceling them entirely.
7. Re-evaluate the relationship between costs and results.
The hidden costs of a business are enormous; you often incorporate them into a fixed operational schedule and take them for granted as expenses you have to pay.
Use the corresponding Cost-Income Statement template (not the cost-income statement from the company's overall financial report) for each individual or department within the business; this will help each department save on unnecessary costs.
For example:
When reviewing a salesperson's Cost-to-Earnings report, you might see travel, phone, and entertainment expenses incurred for 10 potential customers, but those 10 potential customers either made no purchases, or had a low purchase rate, or the purchase value was small. This is the area where you need to immediately address the effectiveness of spending compared to the results generated, also known as the Cost-to-Earnings report.
