A challenge, especially if your finances are tight and your resources are scarce, is how to increase cash flow without overworking your staff or compromising the quality of the products or services you provide. Streamlining costs makes the process easier and directly affects your profit margin.
Reducing expenses can increase revenue. Systematic cost-control techniques can result in right away savings as well as competitive profit margins.
How to reduce operational costs for your small business
Several small business roles and divisions are amenable to cost-cutting techniques:
- technology purchases
- contracting out ancillary business operations
- Hiring
- conversing with suppliers
- Keeping an eye on and modifying business operations
In-depth analysis of each component will be provided, along with suggestions for cost- and profit-cutting measures.
1. Embrace technology.
Analyse the administrative procedures that are currently in place and pinpoint the areas where automation and technology could free up employees from manual labour. Implementing the most recent software and solutions can significantly lower operational costs as business technology is evolving quickly.
At a fraction of the cost of hiring human resources, many online solutions can automate a variety of small business functions. You can save hours of manual labour each day by automating repetitive tasks, which will free up workers' time to focus on the productivity of the company. Technology also lessens human errors because machines are not prone to errors.
Here are some tech-based ways to cut your operating expenses:
Reduce your payroll burden.
In order to increase efficiency, use accounting and invoicing software instead of hiring a bookkeeper and staffing a billing department. The time spent on routine tasks can be greatly decreased with the help of accounting solutions, freeing up team members to focus on other important business objectives.
Lower your marketing costs.
Try out some low-cost marketing strategies and tools. For instance, to directly reach your target market, experiment with Pinterest ads, use Instagram for business, and look into Facebook marketing tools. Another way to get your company in front of customers who are actively looking for your goods or services is through Google Ads.
Pay less for office space.
The COVID-19 pandemic has taught us that office space is not always necessary. In fact, the Federal Reserve Bank of Atlanta's Survey of Business Uncertainty discovered that the proportion of work-from-home days is predicted to nearly triple from pre-pandemic levels, rising from 5.5% to 16.6% in the post-pandemic era. Take into account office space reduction or elimination with an increased remote workforce. While Skype, Slack, Trello, and Zoom enable virtual meetings and collaboration, Google Drive or Basecamp centralises document and file storage.
Save on travel expenses.
A sizeable portion of a business's overall operating expenses is made up of commuting expenses and travel reimbursements. Instead, schedule meetings and presentations online to save time and money. An excellent tool for holding meetings, webinars, and presentations online is Webex by Cisco.
2. Outsource business functions.
Another clever strategy to lower operational costs is to find an outsourcing partner for auxiliary business operations. Outsourcing keeps your business lean while cutting payroll expenses. You'll be able to devote your time to activities that generate income rather than devoting it to managing unnecessary tasks.
Here are a few services that might be successfully outsourced.
Tax preparation:
You don't necessarily need an internal team of hardware experts if you only need to manage a small number of computer systems. Although they don't crash every day, a service centre close to you can help when they do. In addition to fixing your computers, an outsourced IT provider can provide a number of beneficial services, such as installing software, troubleshooting performance problems, and regular system maintenance.
Customer support:
Every company deals with customers, and providing good customer support is a necessity that cannot be overlooked. However, maintaining a customer support team can be expensive, particularly when you factor in hiring and training costs. Many small businesses would rather outsource customer service functions to a third party than manage them internally.
Marketing:
To handle your advertising, social media marketing, and other marketing initiatives, you might want to hire an outside marketing company. With so many marketing channels available, hiring an experienced in-house marketing executive can be expensive and confusing. Interview marketing firms to learn how you can use their experience and knowledge to expand your business. Typically, agencies will offer a proposal with budgets and recommendations to help you choose the best outsourced marketing partner for your requirements.
3. Make smarter hiring decisions.
Reduce annual HR costs by making wise hiring choices, such as seeking out candidates with a variety of skills. For instance, it's a huge plus if your new administrative assistant is familiar with content marketing.
Another suggestion is to hire contractors rather than full-time workers. For short-term projects, many small businesses are turning to exceptional professional freelancers. The way startups now compete with long-established businesses has been revolutionised by this practise.
Small businesses can save a tonne of money by hiring freelancers and interns. Employ contract workers for as long as necessary to complete the project; you don't have to pay them if there is no work. The work is completed, and the overhead is not included in the payroll obligations you have. It benefits both parties.
Here are a few areas where businesses can frequently gain from using independent contractors.
Copywriting:
Do you need someone to write compelling content for your new website, your weekly newsletters, or your blog posts? If so, look through freelance job sites like Upwork or Guru to find a tonne of talented copywriters for a small fraction of the price of hiring full-time workers. Most freelance copywriters charge by the hour or the word. According to Upwork, copywriters charge $19 to $45 per hour, though rates can be higher depending on a number of factors, such as the amount of research required, the specialisation of the content, the type and complexity of the project, the level of expertise required, and the urgency of the deadline.
Web development:
You might hire a freelance web designer to create your company's website. In comparison to hiring a full-time web developer or one of the top website builders and design services, using a freelancer is less expensive. Some small businesses hire web developers based abroad because they typically charge less because the work involves coding a lot. You could build your own website using a web template service like Wix if it's a fairly straightforward website.
Search engine optimization:
Any online business' success depends on its organic visitors. While large companies have the resources to assemble an internal team of SEO specialists, startups may find it challenging to hire an SEO specialist on a full-time basis. Freelance assistance is available. Among other things, a freelance SEO contractor can optimise the code of your website and add keywords. They can maintain your site's visibility by fixing problems and submitting listings for a monthly fee.
Graphic design:
Want a quick flyer created? To create the landing page template for a fresh email marketing campaign, you need a graphic designer. A freelance graphic designer is the ideal choice for on-demand design projects. Your best bet for finding an awesome graphic designer for as little as $5 per task is a website like Fiverr or 99designs.
4. Negotiate with vendors.
Are you purchasing goods and services at the most affordable rates? Examine your operating costs to identify areas where you might be able to bargain for lower rates. Think about the following elements.
Volume discounts:
You may be able to receive a volume discount if you buy goods or raw materials in large quantities.
Good-customer flexibility:
Profit from the fact that your company has a long history of doing business with the vendor, has a stellar payment record, or frequently places expensive orders. The seller might be flexible on price because they don't want to lose you as a client.
Major-customer status:
Do you represent a minimum of 10% of the vendor's annual revenue? If so, you are in a strong position for negotiation and ought to be able to lower the price.
Competitors’ prices:
Comparing prices charged by competing vendors for the same service or supply can help you bargain. You always have the option to change vendors if the vendor won't negotiate on price.
Reviews or testimonials:
Offer to write a favourable review or testimonial for the vendor to use in marketing. The vendor might offer reduced prices as a way of saying thanks.
Non-price concessions:
Even if you are unable to reduce the overall cost, you might be able to negotiate for other contract term changes like better payment terms or a quicker turnaround time.
5. Continually analyze and adjust.
An ongoing process that calls for constant monitoring, analysis, and adjustment is running a successful business. To make sure you aren't spending more than is absolutely necessary, examine a number of cost factors.
The following are some areas to keep an eye out for potential cost-cutting opportunities.
Employee time:
Are there busier periods of the day, week, month, or year? Schedule more hourly workers during busy times and fewer during slow times if you have any. If you have a POS system, view POS sales reports by the time of day, week, and month to make the most of employee time. Dashboards are another feature of the top credit card processors that let you view different sales reports. By keeping track of your staffing requirements, you can guarantee coverage while saving money.
Inventory levels:
When renting warehouse space, keeping inventory can be expensive. Examine sales reports by time period and product in your inventory management software or POS system's inventory features to establish the ideal inventory levels. Focus on the details of the product because some sizes, versions, or colours may sell more than others. As an alternative, use a just-in-time inventory strategy to cut costs; for online orders, think about dropshipping directly from the supplier.
Finance costs:
Even though personnel and inventory costs are more variable, you should still review your financial costs on a quarterly basis. Are you earning the highest interest possible on your bank deposits? Should a current business loan be refinanced at a lower interest rate? Should you bargain with the company that processes your credit cards? A routine audit will make sure you aren't being taken advantage of by your financial vendors.
What are operational costs?
Operational expenses include things like the following that you must pay on a daily basis to run your business:
- Cost of goods sold (COGS) is the cost of purchasing, producing, packaging, and selling a good (service businesses typically have very little or no COGS).
- utilities, rent, and equipment lease payments
- Internet and phone service
- Insurance
- Advertising, trade show fees, and graphic design are examples of marketing costs.
- sales costs, including transportation
- Payroll and additional HR costs
- Office costs
- Processing credit cards and additional bank fees
On financial statements, gross profit is calculated by deducting the cost of goods sold from total revenue. The net profit is then calculated by deducting other operating expenses from the gross profit. This is the remaining money that will either be given to the company's owners or invested.
Reducing overhead
A tried-and-true strategy to improve margins is to lower operational costs. But in order to do that successfully, you must pinpoint the areas where cutting costs is practical. Involving customers and suppliers can help you identify areas that could use improvement. The proper evaluation of your profit and loss statement is equally crucial because you don't want to take any unnecessary risks that could negatively affect the performance of your company.
Keep in mind that there is no one-size-fits-all strategy for reducing expenses and raising profitability. Something that works for one company may not work for another. However, a company with reduced operating costs is better positioned to demand higher profit margins, so make sure things are running smoothly.
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