7 Ways to Reduce Cost in Your Business
As all business leaders know, when a company becomes strained and pressed for cash, we need to look for ways to reduce our costs and expenses. While cost control is always important, we naturally spend more during periods of growth to support the increasing size and momentum of the organization. The challenge comes when growth slows and we need to figure out where to reduce our expenses. Sometimes cost reduction simply comes in the form of limiting spend until things pick up. Other times we may need to take a hard look at our internal business activities to identify where our money is going in order to find ways to spend less. Regardless of which scenario you might be in, the goals are always the same. Reduce our costs to preserve our business.
Spending Less Vs. Spending Wisely
Before we get to our cost savings tips, let’s briefly touch on what we mean by cost savings. Although we tend to lump them into the same category, there are really two forms of controlling costs in business. First, there is the more traditional and conventional idea of cutting business expenses: travel, training, benefits, staffing, perks, investments, etc. In its traditional form, anything that simply involves spending less can be considered cost savings.
But there is a second layer of cost control that is often missed and overlooked, which we might call ‘spending wisely’. What do we mean by this? Spending your money wisely is really about optimizing your cost structure and spending money that make the business run more smoothly and efficiently. As a simple example, if you have 50 highly paid software developers working in your office, a wise expense would be to also hire an administrative assistant so that you can consolidate administrative work onto a single person, thereby taking a portion away from the rest of the staff. Doing so in this case would enable your expensive software engineering team to focus on what they do best: developing software. Spending wisely is really about efficiency and making intelligent investments that maximize the value of your other expenses.
Enough of that! Here are 9 tips for controlling cost in your business…
1. Eliminate the Waste
The broadest form of cost reduction for a business falls under the banner of eliminating waste. Elimination of waste, or muda, is a driving concept behind the highly successful Toyota Production System (TPS). In TPS, there are seven primary forms of waste: transportation, inventory, motion, waiting, over-processing, over-production and defects. In all cases, the various forms of waste lead to lost energy or unnecessary effort that could be better utilized elsewhere.
To put this in a little more tangible terms, here are types of waste you might need to reduce or eliminate in your business:
- Physical Waste – paper, cardboard, materials, equipment; the less you use, the less you spend (and it’s good for the environment)
- Flawed Processes – using processes that are outdated or that result in product errors that cause defects or scrap
- Non-Value Added Activities – activities that are counter-productive or obstructive to your higher priorities waste time. If you’re in the middle of a crisis, for example, eliminate anything that takes energy away from the challenges at hand or is not considered business critical.
- Transactional Waste – how many starts and stops do you have in a given day? Efficiency is lost when people have to make a physical and mental shift between tasks. The less focus you have, the more transactional waste you have.
2. Excess Assets and Inventory
Although it is a form of waste in TPS, this one deserves to be spiked out on its own. The best way to think about assets and inventory is to view both as forms of cash. For your business to run smoothly and to free up cash, be sure to monitor where your money is going and optimize how much you commit to materials.
For example, if you run a landscape business and own 4 trucks, even though you rarely use more than 2, you have cash tied up in extra vehicles. Similarly, if you are in manufacturing and have enough raw material for 20,000 pieces on hand, even though you only produce 10,000 a year, again, you have cash tied up in raw material that could otherwise be used for other things. When in a cost-containment mode, be sure to look at your assets and inventory to identify areas where you can de-commit cash – perhaps by selling items to generate cash, or by slowing the incoming receipt of new supplies, as appropriate.
3. Introduce Automation
If you’ve been in business for many years, chances are, you have old and outdated ways of performing certain tasks. Nothing to be ashamed of, it happens. Automation is particularly useful when it replaces repetitive work or time-consuming activities with either software or equipment that conducts the task so you don’t have to.
How about an example? If every morning, your Customer Service employees spend time reviewing new orders that came in overnight so that they can reenter the data into another system line by line, automating the order-entry process could benefit your business and free up their time for other things.
Automation would fall into the category of spending wisely as discussed above. You cannot automate without putting up some funds. However, by performing a simple business payback analysis, you should be able to determine how much you’ll save and how much time it will take to pay off the investment.
4. The Beauty of Outsourcing
A popular business concept that started in the 80s and gained tremendous popularity in the late 90s, outsourcing (named from “outside sourcing”) is the process of hiring an outside individual or business to perform a task, generally because it’s cheaper or easier for them to do it than it is for you to do it internally. Examples of things you might want to consider outsourcing: payment processing, cleaning and maintenance services, small batch production, piece-part manufacturing, food services, and IT support. Anything that is not considered a ‘key competency’ of your business or part of your value proposition is an excellent candidate for outsourcing because there is probably someone else out there who can do it more cost effectively than you.
For more on outsourcing, check out The Pros and Cons of Outsourcing.
5. Optimize Your Labor Costs
What do we mean by optimizing labor costs? A good way to think about this cost reduction strategy is to see it less as more of an optimization of expenses that goes back to the old saying “time is money” and our previous point on transactional waste. Using the example at the beginning of this article, in simple terms, the idea here is to have expensive people do ‘expensive’ work, and use a lower cost labor pool for less expensive activities. It may sound simple, but many business fail to do this.
For example, if you run a software development company and have a customer meeting coming up, would you have your software engineer who you pay $100/hour spend his or her time arranging for food to be brought in, coordinating visitor transportation and planning a post-meeting social event? Or would your money be better spent by having and administrative assistant on staff who can handle this type of activity for your entire business? Sure it’s another person, but you can keep your expensive employees working on their specialized work and have someone else take care of the other activities. Keeping employees focused on what it is they do best reduces transactional waste and helps you run a smoother business overall.
6. Kill Your Bad Projects
Though sometimes uncomfortable and undesirable because it can feel like you’re admitting defeat, it’s always important to look in the mirror and identify where your money is going. A bad investment is a bad investment, period. Many businesses continue to invest in bad projects, untested ideas and misguided principles longer than they should, for they are unwilling to pull the plug even when the time is right. Though experimentation and exploration of ideas and concepts is important, it should always be done responsibly. More often than not, you will find investments and initiatives within your business that are not adding value, and should really be deferred or cancelled in order to apply funds and energy on more critical activities.
To offer a personal example, between 2012 and 2014, my firm spent $1.2 developing technology that it believed held value to the market. When we had developed it enough to discuss trials with our customers, the feedback was luke-warm at best. One customer even said “this is interesting, but it’s not one of my top 50 problems.” Still, for another 6 months, we continued to invest nearly $800k until we came to our senses and decided to put the project on hold.
7. Reducing the Size of Your Staff
Finally, let’s talk about people. An easy, but unpopular and emotionally challenging option way to reduce your business cost is to reduce your staff size. Though effective for reducing costs, and certainly necessary at times, this option should always be used with caution, for several reasons.
- Downsizing and layoffs can only go so far – you still need a certain number of people to run the business. If you simply reduce staff as a means of achieving profitability, you also run the risk of hurting the business’s ability to perform over the long haul.
- Depending on the work you do, consider the skills and knowledge the employees have of your business or products. Before deciding to reduce, can you reallocate or redeploy people within the business to make it run better and hold on to the skill set? Once they are gone, you may not be able to get them back.
- Layoffs and staff reductions often have a profoundly negative impact on morale and the motivation of the employees who remain. If you choose to reduce staff, make sure the data, the reason, and the alternatives considered are clearly communicated so remaining employees understand how the decisions was made.
While layoffs and staffing reductions are needed from time to time and offer cost savings almost immediately, there are a number of considerations and decisions to be made with utmost care.
There you have it, 7 great cost savings ideas for your business!
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