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A Checklist for Strategic Cost Cutting

Q: What are some key ways to cut costs for my small business?

A: When a business owner asks this question, my first response is, "Is this what's most important right now?"

To figure out the answer, I'll want to know if there's been an in-depth analysis of the company's financial statements and key performance indicators, and the relative profitability of products or product groups, along with customers or customer groups, salespeople or sales channels. I ask for this information because the need--as opposed to a measured and rational desire--to cut costs is an indication that something's not working with the business model.

Don't get me wrong, though--reducing the amount of money flying out the door is a good strategy, and once I'm sure that slicing the fat from a budget makes sound business sense, I'll use the following checklist to start tackling costs.

Dial up a new telecom system. Everything's up for grabs: landlines, internet, wireless providers, equipment and service plans. First step, contact a telecom consultant who will analyze your needs with no upfront charges. Instead, they take a percentage (usually 50 percent) of any savings they find; many consultants won't deal with you unless they can uncover enough savings to make it worth their time--and yours.

Quick tip: If you're not using a modern VoIP-based system for multiple phone and internet connections, you should--you may be able to save up to 50 percent on your equipment costs.

Enforce a no-splurge business-travel policy. The slush fund that is the travel and entertainment budget is often a black hole of overpriced airline tickets, hotel suites and lavish meals. Put an end to it by instituting a written policy that requires employees to seek out discounts or less-expensive alternatives. Then enforce it. I was able to save my company more than $5,000 per month by making the staff accountable for their travel budgets.

Move IT to the cloud. Moving software and digital files off your desktop and into a virtual environment accessible through the internet can reduce the need to upgrade equipment and software every couple years. To put the cloud's efficiency savings in perspective, today's startups can reduce their IT build-out by a factor of 10 to 1 compared with 10 years ago.

Make overtime a crime. For hourly wage businesses, overtime can kill the bottom line. Yes, seasonality and other factors may require more manpower at times, but in most cases, businesses know when to expect them. Smart planning that expands full-time or part-time staff to soak up the overtime hours with straight-time wages can almost eliminate time-and-a-half pay. I've seen cases that resulted in labor savings of 10 to 20 percent.

Use credit to earn vendor discounts. Take advantage of any early-payment discounts offered by your vendors. If they don't offer them, ask for them. Then tap your credit line to pay your vendors immediately. Here's why: A 2 percent discount for payment within 10 days equates to a 72 percent APR. At that rate, you're almost guaranteed to come out ahead by using your credit line. You'll also likely jump to the head of the line as your vendor's VIP customer.

Whatever steps you take, don't wing it. Write out a plan and assign clear managerial responsibilities and authority to carry out each task. By the time you're all done with the first round of cost-cutting, you'll be ready--and more experienced--to do it all over again.

Joe Worth, Vice president of operations and partner at B2B CFO, has been a CFO for several public and privately held companies.

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This article was originally published in the September 2012 print edition of Entrepreneur with the headline: Trim the Fat.

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