Increase Profit by Reducing Costs

 

 

Get Results: reduce costs
Get Results: Reduce Costs

Having run a number of businesses over the years I have come accustomed to dealing with the day to day challenges that come along and the reactionary style owners often adopt in dealing with them. One of the key challenges I have found is to remove myself from a state of “fire fighting” and into working on the business and not in it.

Working on a business involves some strategic (eyes glaze over) thinking and planning. As a business owner I am constantly looking to increase profit and in doing so must look three areas:

In this article I’m going to cover what is often considered the most boring of the three topics “reducing costs“, But saving money within your business is probably easier to achieve then increasing sales, where you need to spend more on advertising or communication with existing customers all of which will involve some form of expenditure, and increasing prices which can be a scary proposition, with research showing it causes much anxiety amongst entrepreneurs and business owners alike. Taking costs out of your business will directly impact the bottom line and increase profits, if done correctly.

There are two ways to reduce costs:

  • Reduce costs as percentage of sales. For example higher sales on  the same costs or costs rising less than sales are rising
  • Simply cost cutting – However simply cutting costs is not always the answer as it may adversely impact sales and margins. If efficiency or output is reduced as a result of cutting costs than some analysis of the risks and rewards needs to be undertaken first.

5 step plan

Go through this 5 step plan in the sequence I have laid them out, this will prevent you feeling overwhelmed.

  1. Eliminate waste and spare capacity. Use your time wisely, don’t waste hours and hours trying to save a few pounds.
  2. Consider your position on a long term view versus a short term view. Set the level of investment spending where you want it to be.
  3. Make sure your pricing is set correctly, failure to do this prevents you from knowing the potential of the business. (Check out my pricing strategy article here)
  4. Understand your product offerings. what products haven’t been costed properly, what products aren’t valued by your customers but weigh heavily on costs. What parts of your business have moved away from your core activity and do these contribute sufficiently to profits
  5. Strategic review. The business is the wrong shape. Going small and more niche or larger to cover cost base by pursuing better margin areas of your business.

Below is a list of other areas to consider:

Employees

One of the first things that businesses look to cut when making cost savings are with regards to employees, because generally employees are one of the biggest costs and biggest headaches (in an admin sense) for companies. This can be done a number of ways, by reducing staffing levels, introducing short time working, imposing salary freeze, and or reducing pension service costs. However taking this approach can cause an adverse effect on company morale, efficiency, staff absence and turnover levels and may cause issues with supplier relationships, where supplies reduce credit arrangements for fear of not getting paid by a company that is perceived to be struggling. Another way of dealing with such costs rather than simply cutting is to improve productivity.

Improving the productivity of employees is a more positive way of reducing costs per employee, and should involve the employees in the formulation of this process. If they are involved in the development process they will have ownership of it and will be more likely to follow through on initiatives. You don’t need to introduce productivity incentive bonuses to improve productivity, creating a happy working environment where employees are valued and feel they are contributing is beneficial for all.

Increasing Capacity

If you’re increasing capacity, employ an extra shift before adding more space to increase output. This will make it easier if capacity drops again so that you’re not stuck with the cost of a long lease and under capacity.

Outsource

Outsource all non-core tasks. If you do certain things infrequently look to get things off the books and done by a specialist on a freelance basis..

Supply chain management

Look for bulk purchase discounts, or source cheaper suppliers (but be wary of the risk of supplier failures or enforced single sourcing), reduce stock levels, cut excess production capacity in tougher times. Reduce inventory levels and move to a “just in time” supply or materials

Other options

  • Cut capacity, such as closing business units (stores, website etc),
  • Sale of business units, such as Clapham house selling Tootsies
  • Oversees shifts – moving operations to cheaper lower cost locations (be wary of weakening of control over quality)
  • Asset value write downs – (none cash write downs, cleanse the balance sheet and give clear picture of  the trading position, setting a new base to build on. This is more of an accountancy issue rather than something that physically impacts the business.

Debt Management

The general rule of debt management is to pay off your debts, such as your mortgage, loans and credit card bills, before you start to save money. This is because the amount of savings income you can get is almost always dwarfed by interest rates you pay on your debts. To check whether you are better off saving or repaying your debts, you should compare the interest rate on your credit facilities with your savings or investment rates.

Pay down debt levels to reduce debt service costs when surplus income cannot be utilized better through investment or purchase of assets.

If times are really desperate, consider a Company voluntary arrangement (CVA), which would release it from certain liabilities to its landlords.

14 Savings on Purchases

  1. Don’t buy impulsively!
  2. Do your research – do your research to find out when the industry is on the downside of the demand curve and buy, buy, buy.
  3. Know about the secondary market – returns or refurbished
  4. Understand that retailers are in business to make a profit on you – Retailers always have to move through product to make room for the next batch.
  5. Don’t be an ‘early adopter’!
  6. Don’t be afraid to ask for a discount
  7. Buy during off-peak times
  8. Don’t give in to the fashion trends
  9. Always be ready to walk away.
  10. Expose your purchase to competition – Squidbid.com is a Demand Driven marketplace which has developed a cool concept.
  11. plan needs (no impulse buys)
  12. shop for value
  13. ask for discounts
  14. examine receipts and bills

Summary

So there you have it, cutting costs doesn’t need to be boring. In fact saving costs is tax free, in many cases doesn’t require any capital and doesn’t rely on any marketing activities. It’s often the easiest way to put money back in your pocket so should be the first area of consideration when looking to increase profits. Check out the other two areas by clicking on the links below.

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