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The Right Way To Reduce Business Costs

When I was learning how to be an auditor, one of my early mentors told me: “There’s the wrong way to do the wrong thing, the right way to do the wrong thing, the wrong way to do the right thing, and finally the right way to do the right thing. As an auditor, you’re always looking for the wrong ways as well as the wrong things!”

I had to think about that.

But he was right. You shouldn’t ever do the wrong thing, whatever way you try to do it.

It’s also equally wrong to try to do the right thing in the wrong way.

All this is a long way of saying that when times are tough and we try to cut costs in our business – which is the right thing to do – some of us go about doing it in the wrong way.

Let’s look at how to reduce the costs of running your business, in the right way.

But first, let’s talk about why you are doing this.

Reducing costs should not be a knee-jerk reaction to rising prices, reduced sales, and loss of profits. The whole idea of reducing costs is to find efficiency and returns on investment. This is something you should do all the time, but the effects are much more felt and seen when times are tough.

Having said that, before you look at costs, you need to understand the reasons for any downturn in your business. Rising prices, fewer sales and lowering profits could be caused by a lot of different things.

Is it possible that in your early years, being a new business, you attracted customers? Then as time went on and you matured, your early customers settled down and made their choices based on other factors? You need to ask yourself this dispassionately because if this is a pattern you fit, then you need to look at other factors such as better marketing and customer relations, improving your products and finding their unique selling proposition. If these factors are the cause, reducing costs is not going to help in the long term.

Alternately, rising prices may be caused by a number of other factors as well, such as inefficient buying decisions, overstocking, needing to find different suppliers and so on.

However, if you have looked at other causes and concluded that the state of the economy is what is driving your profits down, then it is appropriate to reduce costs and find efficiency.

Remember, the purpose is not to cut costs in the short-term, but to find efficiency, which will last the long-term.

And here’s the funny thing – finding efficiency can mean spending more, to find a better return on investment!

So, here are 12 ways you can find more efficiency in your business. The first six are “defensive” strategies where you control your spending, and the next six are “offensive” strategies where you undertake new initiatives to make sure that you are the one still open when others find the going too tough.


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#1 Control Your Inventory

Identify which lines of stock turn over quickly.

If you do not already know find out immediately the number of days’ each line of stock takes to turn over.

Calculate economic order quantities (EOQ) for each line of stock – this is a function of cost, the time taken to receive an order from your suppliers, and the time taken to turn over stock in hand.  Ensure you are only carrying EOQ’s in hand as otherwise, you may be sitting on your profits as your stock sits on your shelves.

#2 Retain Your Cash

Cash is king when times are tight.

Cash is always king, but especially when times are tight!

Where assets such as stock and capital investments or plant and equipment may have been good investments in times of growth, in tough times, cash in hand is necessary to take advantage of opportunities and make rainy day decisions.  The other 5 defensive strategies will help you retain cash, however, the most important strategy is to keep the focus on cash and cash transactions.

Ask yourself questions like: “Can you find a cheaper supply?”

“Are discounts available?”

“Are you carrying excess plant and equipment that can be sold?”

“Can you be more efficient or productive?”

#3 Keep Receivables Flowing

Ensure that you are in constant communication with your customers, not only for offensive purposes as discussed later but certainly to be aware of their trading conditions.

Do not get caught out by customers closing down when they owe you money.

Review your credit policies.  As soon as debts become overdue, call them and find out why.  Offer discounts for early payment (without allowing margins to suffer significantly).

Be prepared to stop supply to customers who are using you as their bank because that costs you money.

#4 Check Your Costs

Review all your expenditures and ask yourself if any savings can be made.

But a word of caution –  I say “check your costs” not “cut your costs” – the answer to whether you can and should cut certain costs must be made in the light of maintaining trading positions.

For example, it seems obvious that you can save costs by reducing telephone lines from 6 to 2, but if your business needs constant telephone contact with customers and all 6 lines are constantly lit up, reducing this cost merely restricts your business model.

Also, ask yourself if a certain cost actually provides a good return on investment. For example, $1,000 spent on newspaper advertising is found not to bring in any customers while $5,000 spent on printing and giving out T-Shirts is found to bring in $50,000 of orders – which one should you cut?

#5 Review Your Loans And Borrowings

Most businesses have a set-and-forget relationship with their banks.

That is, they arrange a loan or some other facility and then fail to communicate with their bank until it is time to renegotiate.

Instead, you must keep your lines of communications with banks open.  Ensure they receive financial reports from you on time, develop a relationship with your bank manager so that they know how your business is travelling.

At the same time, review your arrangements – they may have been made some years ago when interest rates were high.  See if borrowings can be refinanced or renegotiated. Change banks if you have to – the days of loyalty and personal relationships is over.

#6 Increase Productivity

When times are good your business’ efficiency and productivity are often allowed to slip, particularly as too few businesses measure productivity.

How do you measure the productivity of a retail business or a medical practice?  Surely it is much easier to measure productivity in a manufacturing business or a law firm that keeps timesheets?

It may be easier but it is not impossible to measure the productivity of any business.

You can measure the productivity of staff (how many units of Widgets/Letters/repairs etc., do they complete in a day?), of processes (how long does it take to complete the process?), of equipment (how many hours a day can it operate/how many sheets of reports can it print etc.?

In a retail business, ask how many customers do individuals serve a day?

All you have to do is ask, what is the ultimate outcome of the process or service, and how long does it take to complete the process or provide the service. Once you know how to measure your process or service productivity, think of ways to increase productivity:

  • Find a way for staff to work more productively perhaps with a new process, the elimination of some unnecessary steps, or the implementation of automation
  • Increase the number of hours worked by your equipment
  • Implement procedures so that retail staff can deal with customer enquiries more efficiently through training and new steps

#7 Increase Marketing

The worst possible thing you can do when there is increasing competition for your customer’s dollar is to reduce marketing – that’s just leaving the field to the other team.

As you reduce marketing your market forgets you.

Low cost or no-cost ways to increase marketing may involve “inbound marketing” on the web through your website. Build a better website, increase search engine optimisation, use social networking sites such as YouTube and Facebook.

An effective outbound marketing strategy that involves a low additional cost (other than time) is to increase contact with customers. One of the most effective means of cost-effective marketing is simply doing what you do well but doing it even better, and ensuring customer service is tuned to 100%.

#8 Focus On Customer Service

Do not allow your customer to forget you and especially the quality of your service.

When you are face to face, smile, ensure you are listening to their needs, thank them as they leave whether or not they have bought something.  Keep up contact with them, call them after they have bought something to see if they are happy with the product and the service, offer after-sales service and “frequent buyer” programs.  Give them value-added service without it costing you much more – faster delivery times, wider selections.

Survey after survey has found that businesses who spend more time focusing on customer service retain customers. Think of your own experience of a business with a declining service attitude (perhaps because they have reduced shop-floor employees). You probably said to yourself “I’m not coming back here again!”

At these times, increase your focus on customer service and keep your customers.

#9 Look To Diversify Or Pivot

Changing economic times may be an opportunity for you to offer complementary products, or to use your skills to provide a different service.

Once you have measured your stock turn  (defensive strategy number 1) look to increase products and services with selections that meet real needs.  Firstly, see if any products or services related to the ones you sell now are more appropriate in tighter economic times – whitegoods retailers should look for new lines of appliances that cost less to run, investment advisers should look to introducing financial health reviews of client investments, service providers should look to provide “packaged” extra-value services, and so on.  Secondly, look at products and services that competitors are exiting from, perhaps defensively, especially where these leave demand unsatisfied.

You can also reassess your skill-set and expertise and pivot to something that is needed.

During Covid, theatre stage builders Stage Kings turned their idle machinery and materials to producing flat-pack work-from-home furniture like computer desks and shelves. How can you use your resources to pivot your business?

#10 Invest In Great Employees

While it is true that at all times we should look after our best employees, when we are busy and our sales are going through the roof, it is easy to allow the odd non-performer to slip through simply because we need the extra hands.

Some of these non-performers may have been weeded out as you went through defensive strategies to increase efficiency and cut costs, but you now need to turn your attention to the winning members of the team. At destabilising times, they may have their own fears and concerns. You do not want to lose them.

In many businesses, they are your first contact with the customer and their importance is tenfold.

You need to recognise and reward winners to ensure they stay with you, that they feel appreciated to keep performing, and where necessary, pick up some of the slack from the non-performers that you have had to let go.

#11 Innovate!

As much as marketing and customer service, innovation will keep you in the minds of the customers.

Pivoting is an example of innovation.

But innovation may also take the form of innovative customer service and not just in new products and services. Provide new ways they can contact you through your website and digital portals, automate emails to thank them for their purchase and follow up on satisfaction, offer online ordering or purchasing, offer Zoom calls if they need to discuss something.

You can also use the latest technology to get your services or goods to market faster; use new methods to improve the speed and quality of processes, use existing resources in different ways.

#12 Create Partnerships

As businesses feel the pinch, supporting one another is a good way to keep head and shoulders above the competition.

Offer to cross-sell with related or nearby businesses.  For example, get together with the local restaurant and offer a dinner for two for every purchase above $200 (and the restaurant can offer a small gift, collectible from your store for every bill above $200).  If you are a clothing retailer, for example, you might get together with a local shoe shop and offer discounts for a matching pair of shoes (and the shoe shop can return the same discount offer).

You can even partner on some costs – for example, if your staff have shareable skills, you can share staff on reduced hours; or you can share one bookkeeper, and so on.

So, in conclusion, when you are thinking about cutting costs, remember that the exercise is not to just cut costs in the short-term but to find greater efficiency to last the long-term. The wrong way is just to slash what you think you can cut. The right way is to look at returns on investment and ultimate outcome.

Take these 12 strategies to find efficient costs in your business – and find many more valuable strategies to grow your business from our website. Get them delivered directly to your inbox every week.

See you soon!




Cover image by Nik Shuliahin on Unsplash

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