Entrepreneurs start businesses with various goals. The most popular of these is to grow profit. Without it, the business can’t sustain itself or the owner who works tirelessly to build it.
The common impulse among entrepreneurs wanting to increase profits is to simply hike the selling price. The calculation for the profitability of this method is easy to understand.
But a price increase can sometimes backfire; customers may be alienated and stop buying from you. Of course, this depends on how many substitutes there are for your product, the strength of your brand, the price elasticity of demand, and several other technical stuff.
To stay on the safe side, avoid price hikes and seek alternatives. And one of those alternatives is to reduce your business costs.
You must remember that profit is what remains after you subtract costs. So if you have a low-cost base, you will end up with more profit.
However, entrepreneurs usually dismiss cost reduction strategies saying they only save pennies. They forget that those pennies may add up into significant percentages. Consider this great quote:
“While it may seem small, the ripple effects of small things is extraordinary.” Matt Bevin
So without further ado, let’s look 3 cost cutting strategies that will instantly increase your profits.
1. It Begins with Efficiency
It pains me when I see how much money small business lose as a result of simple inefficiencies. $4 of coffee per day may not seem much. But in a year, it adds up to $1460. Now think of how many such costs are there in your business. If you could reduce or eliminate these, your savings would be noteworthy.
Here is how you can reduce your business costs by being efficient:
Go green—get LED bulbs for your office, which are 10 times more efficient than old filament bulbs. As for desktops, consider mini computers. Despite the small size, you will find they have enough power for word processing, emails, and several non-demanding activities, and will typically only use 15-30 watts while a full desktop computer can consume 150-300 watts.
In addition to this, turn off electronics when not being used.
Reduce wastage—if you manufacture, reducing wastage should be a priority. Any damage you incur during production represents an increase in cost. Here are the best ways to reduce wastage:
- Employ skilled labor
- Use modern equipment
- Source high-quality materials
- Get training.
Cut shipping costs—if you can’t find a supplier that’s closer to you, try to find a cheaper but reliable shipping method.
Reduce holding costs—keeping lots of raw materials or products comes at a cost. You need to have lots space, increase your security, and invest in stock management. So ensure that you only hold as much stock as you need. Owing to this, you may have to switch to a reliable supplier who can deliver on time. And as a safety measure, have second supplier to serve as a backup.
Get productive—time is money. And life is made of it. So ensure that every minute you spend working counts. Other mundane tasks that are still important to your business can be done at times when you are not very productive. A British study found that the average Brit spends 43 minutes everyday procrastination during work hours. For a 7.5 hour working day, this represents 10% of productive time wasted.
Fire underperforming employees—these will hurt your Return on Investment. Such employees make lots of mistakes, mismanage customer relations, waste management time through monitoring and disciplining. Additionally, they tarnish your brand. A certain study revealed that just one bad employee can bring down team performance by 30-40%.
Buy used—there is no need to buy new when you can get the same benefits from a used equipment. You can save up to 70%.
Emphasize communication—good communication is the glue that keeps different parts of a business together. For instance, if building a website for your business, have the web designer, web developer, and copywriter together; otherwise, the designer and developer may create a website that the copywriter won’t be able to work with. Rectifying such mistakes will unnecessarily increase your costs.
Outsource—this remains one of the best ways to cut costs. However, most small business owners do it wrong that they end up spending more than if they had not outsourced. To avoid this mistake, do not go cheap (you get what you pay for). And always hire professionals. At the beginning of the project, clearly agree on requirements and deadlines. And most importantly, maintain constant communication for the duration of the project.
Focus on customer retention—it’s easy and cost effective to keep a customer than to get a new one. So ensure that you also focus on customer relationship management.
2. Extravagance Has No Place in Business
Some expenses are unnecessary or avoidable. They just increase your costs without bringing any profits to justify their existence. As such, you must get rid of such expenses. Here is how you can do that:
Become a Jack of as many trades as you can—if you will be doing something frequently, it pays to learn how to do that thing yourself than to hire someone every time. For example, if you hire a PR professional every time, you may as well hire a one-time PR expert to teach you the trade. With time and practice, you will get good at it.
Lose unprofitable ads—it takes money to make money, so marketing is a necessary expenditure. However, spending without monitoring results is stupid. Determine and improve the campaigns doing well and get rid of the underperforming ones.
Go open source or adopt cloud computing—don’t buy software with lots of features when you can get the basics, which may be just what you need, for free. Here are some free software products for small businesses. You can find more free software here.
Avoid credit expenses—make sure you choose a credit card with the lowest expenses. This is common knowledge but many ignore it.
Deal with problems promptly—face all business problems as they emerge. If you ignore them, they may grow and prove costlier than if you intervene early. Think of court cases for example.
Consider teleworking—if your business does not need to have all employees in one place, then save on office space, heating, and other costs by allowing employees to work from home.
Cut back on meetings—while meetings are important, too many of them provide diminishing returns by increasing costs and wasting time. So ensure that you find the right balance.
Pay bills on time—you will avoid unnecessary penalties. Set reminders on when your bills must be paid.
3. Know Who You Can Lean On
Others businesses should not always be seen as your competitors. As long as you are not fighting for the same customers, you don’t have excuses to not work with them. You will help each other grow and will also reduce your business costs. Here is how you can corroborate with other businesses:
Share office space—assuming you don’t need much floor space, you can share rooms in one office and divide the rent. This will give your access to good business locations without stretching your budget.
Share equipment and services—equipment that you don’t use often can be shared. This may include printers, fax machines, furniture for common spaces, and vehicles. You may also share storage space, subscriptions (e.g., of databases if it’s not a violation), security services, and advertising.
Find a sponsor—get other businesses to sponsor your events. The sponsor will get exposure while you will reduce your costs. However, know that finding a sponsor is difficult; you will need to prove to them that they will get their money’s worth.
Seek recommendations—you can partner with other businesses and recommend one another in your line of work. For example, a web designer can recommend a copywriter.
Consider barter—while old, barter trade is still useful. A software developer may give his software to a restaurant in exchange for free food for a set time.
So there are the best strategies to reduce your business costs. Is there something you would like to add to this post? And as a friendly request, I would be very thankful if you would share this article with your friends!