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This year continues to be challenging for many businesses. Between lasting supply chain disruption issues, continued ripple effects from the COVID-19 pandemic, war in Ukraine, and spiraling inflation, businesses are seeing profits squeezed more than any time in recent memory.
Cost coproduntainment, which has always been crucial for maximizing profitability, is still vitally important. But beyond simply reducing costs, businesses need to look at optimizing their total spending. There are many ways companies can make the most of their budgets - some straightforward, some that require a little more effort.
As important as minimizing costs and refining spending habits is, they’re only part of the profit equation. Businesses must also find ways to improve productivity and drive revenue generation. The most creative and successful companies make changes to drive costs down and increase revenue simultaneously, through efficiency.
Following some common-sense steps, companies can put themselves in the best possible position to weather today’s complicated business environment. Here are five such steps.
5 keys to reducing business costs effectively
Cutting costs well involves more thought and intention than slashing through your line item budget. You want to significantly reduce superfluous or inefficient ares, without eating into what works.
Trim fat, not muscle.
1. Don’t sweat the small expenses
Many businesses look at cost reductions in isolation rather than considering the impact of those reductions on the entire business. This leads to obsessive attempts to nitpick every last expense, no matter how small. This can generate negative results that more than offset any cost savings.
A classic example of this narrow focus is eliminating employee perks. It’s a quick and easy cost reduction, with significant longer term implications. Items like free sodas or employee holiday parties are first on the chopping block, despite typically being only minimal parts of the budget.
And any savings often come with costs in terms of diminished employee morale and, subsequently, employee productivity.
Companies should certainly look for opportunities to control employee expenses. But they must consider the context before blindly initiating cost cuts. And businesses should look for higher total impact cost reductions. For instance, renegotiating a vendor contract may have less impact on expenses in the near term but can lead to greater long-term savings.
2. Stick to your budget
Truly successful organizations adopt and track realistic, rigorous budgets. And rather than having a static budget for the year, budgets should be dynamic, evolving as needed to reflect changes in the business environment. Just think how little value a budget crafted in January 2020 had after the onset of COVID-19.
Budgets give the business a holistic picture of expenses and the expected cash flow available to cover those expenses. And this means far more than just identifying which expenses are the highest.
After all, there may be little businesses can do to reduce their highest costs. Long-term leases are a prime example of a large budget item with little leeway for short-term adjustments.
But careful business budgeting will identify opportunities for savings and areas where the business is not properly focusing its spending. It also reveals areas where organizations can achieve long-term savings.
Perhaps that long-term lease will give way to a hybrid remote working structure with more limited space requirements as it nears expiration.
3. Embrace digital transformation
Companies must understand that some cost savings are less obvious than others. Certain savings can initially appear as cost increases. But organizations that understand both short-term and long-term effects can turn capital investments into streamlined operations that are far more cost effective in the long run.
Digital transformation is one investment that turns into substantial long-term savings. It has the added benefits of increasing productivity and, frequently, helping businesses more effectively meet compliance obligations.
Digital transformations help organizations optimize spending and improve revenue generation by:
Facilitating the transition to remote and hybrid working arrangements, which help companies replace physical premises and associated expenses with less costly virtual services.
Optimizing IT spending by transitioning infrastructure and IT services to cloud providers, reducing the need for IT staff (and their associated benefits), and infrastructure purchase and maintenance costs.
Replacing space-intensive physical file storage with less costly and more easily searched digital storage, further reducing physical plant costs and improving productivity and information security.
Automating business workflows, reducing employee time spent on common, repetitive tasks, and allowing employees to focus on more substantive revenue-generating work.
Reducing the costs of meetings by replacing expensive business travel with virtual meetings.
Facilitating online payment processing and collection, reducing average collection times, and improving total collection percentage.
Many small and medium enterprises think that the upfront costs of digital transformation efforts are more than they can afford. But, there are many options to get them started, which they can scale up as they grow, including using open source options.
As a side benefit, digital transformations make businesses far more attractive when owners decide to sell or take on additional investors.
4. Outsource effectively
Many businesses are better served by not trying to do everything themselves. This is particularly true for SMEs, who simply lack the resources to staff every department that a larger organization would have. So every business should consider how outsourcing might help them optimize costs.
Outsourcing functions like HR, recruitment, accounting, IT, and help desk is increasingly common. Businesses can rely on specialized outsourcing firms to efficiently handle their needs, limiting internal employee expenses and focusing limited business dollars on other important expenses.
SMEs frequently also have projects or functions that do not justify hiring full-time employees. And the gig economy offers these businesses an excellent option in the form of freelancers and consultants. In addition to only paying for the time needed to complete a project, businesses can minimize costs on benefits, especially.
However, keep in mind that you must carefully structure these relationships to make sure you do not run afoul of Labor Department or IRS standards distinguishing contractors from employees.
5. Leverage generational trends
Understanding the needs and desires of younger generations also gives businesses opportunities to optimize spending, although they may not realize it. Preferences for remote working are one example. But perhaps the most impactful area is marketing spend.
More costly advertising channels (print, radio, and television) have given way to cheaper digital marketing options. As businesses become more advanced in digital and content marketing, they can use targeted marketing dollars to enhance campaigns.
For example, high-quality content, SEO-optimized websites, or paying to boost social media posts can be very high-return uses of marketing budgets.
Be mindful when cutting costs
The need to minimize costs is nothing new for businesses. However, doing it well today requires organizations to adapt to the modern business environment while still relying on some tried and true processes like budgeting.
Fortunately, expense optimization need not be overly complex nor resource intensive. Start taking company spend seriously today.
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