A lot of businesses are fighting to stay afloat at the moment, as Brexit-related uncertainty, global trade tensions and COVID-19 weigh on the economy. As a business owner, how do you keep your business afloat? Finding ways to reduce costs is something you should consider.
Most business owners focus on growth strategies, sometimes market conditions mean this is just not possible.
You may think you have a lean cost base but even if you’re doing the most you can, there’s always room for improvement.
There are a four ways you can reduce costs, freeing up working capital.
1. Set realistic budgets and stick to them
2. Improved Financial Reporting
3. Invest in technology that will save on labour costs
4. Negotiate better deals with suppliers and outsource non-core functions
Regardless of the economic climate, it is always possible to reduce your costs if you are committed to doing so.
Now lets look a bit deeper.
Cost Reduction Tip 1 – Multi-Year Business Planning with Annual Budget
Business plans are not just for start-ups or when you need additional investment or a loan. A robust multi-year business plan should be the blueprint for your business and therefore, your expenditure.
Planning your expenditure several years in advance is not easy, and do not expect it to be 100% correct. The most important is to understand the upturns and downturns in your business and how this affects your cost base.
Setting clear benchmarks help you plan better in the short term. Each year set a firm expenditure budget and update this at least every three months in a forecast.
Having a clearer picture of expenditure in the future provides you with choice and the opportunity to buy when demand is low.
Take travel costs; for example, massive savings can be made if booked in advance.
Cost Reduction Tip 2 – Zero-based budgeting
Zero-based budgeting is a budgeting methodology that forces a business to review its costs continually. Traditional budgets are created and approved based on historical costs.
With zero-based budgeting, each department starts with no budget and have to justify their expenditure each year. All spending is reviewed and verified before it is approved.
The most significant advantage of zero-based budgeting is it forces you to review your cost base at least once a year and ensures you operate as efficiently as possible.
Cost Reduction Tip 3 – Regular Management Accounts
The importance of producing regular management accounts cannot be stressed enough. Simply processing transactions without analysing the results against a budget or forecast with not help drive business improvement.
Management accounts can be used to leverage your business and can become a key driver in identifying cost savings.
Cost Reduction Tip 4 – Improve Procurement Process
Start leveraging your spending power by negotiating better prices with your existing suppliers.
For instance, if you use several employment agencies to supply temporary staff consider using just one or two.
If you send more guaranteed business you send to a supplier, the more leverage it will give you to negotiate a lower price.
Planning expenditure in advance gives you the opportunity to source goods or services from the broadest possible pool of suppliers at the lowest price.
Over the next couple of years, it may be tough to grow sales significantly. However, you can always improve profitability by reducing costs.
Planning is the most critical aspect of implementing a cost reduction program in the business. Each technique is based on setting targets and reviewing performance regularly. A business that implements at least one of the suggestions above will reduce costs and become more efficient.
If your business spending is out of control, we can help you identify cost savings and build a more sustainable budget. Check out our business growth services and Book A Free Assessment.