Reduce Your Costs And Gain A Competitive Advantage
Grow Your Business, Not Your Inbox
You're reading Entrepreneur South Africa, an international franchise of Entrepreneur Media.
Subway Co-founder Fred DeLuca said: “There are only two ways to make money: Increase sales or decrease costs.”
Of course, increasing sales is pretty much always a top priority for most businesses. But, decreasing costs tends to only really become an issue when sales decline.
When the economy hits the doldrums and sales dry up — as is the case at the moment for many industries all over the world — companies tend to start looking at ways to cut costs. While it’s great that they are trying to cut back on expenses, it’s a shame that they don’t do it even when sales are booming. The fact of the matter is, even great businesses tend to be rather inefficient. A lot of money is squandered when it’s ‘business as usual’. And the larger the organisation, the greater the tendency for money to be wasted.
So try to see the need to cut costs not as an inconvenient short-term intervention, but as a prudent long-term strategy. After all, the more you can cut costs, the more competitive you can be in the marketplace.
But where to start? Below you’ll find six areas in which you can cut back on expenses, provided you’re willing to make some tough decisions and dig deep into the financials of your business.
Implement thorough systems and processes
As the old saying goes: You can’t manage what you don’t measure. If you’ve had a fairly laissez-faire approach to managing your company’s money until now, you need to start paying attention to the details. If you want to save money, doing the bare minimum when it comes to financial controls is simply not good enough. You need to start examining each and every line item. Make it your business to understand the details of your company’s financial situation.
If you have been paying pretty close attention to the details until now, it’s time to take things to the next level. Implement systems and processes that allow you to keep a handle on each and every expense. Make it mandatory for every expense above a certain amount to be signed off by a C-level executive, for example. Or make it your personal responsibility to release every online payment.
Seek outside assistance
Unless you have a strong financial background, or your company is large enough to employ a very experienced CFO, you might want to consider bringing in some outside help. An external (and unbiased) professional will bring a fresh perspective to the business and probably be able to see unnecessary expenses that you don’t notice. He or she will also keep everyone in the organisation accountable and honest.
Lead by example
It’s very difficult to explain to employees why the two-ply toilet paper or free coffee needs to go if you’re still flying business class and stocking your personal fridge with Evian water. There’s nothing wrong with asking employees to make sacrifices, provided you’re willing to join them in the endeavour.
It’s also worth creating a culture of frugality within your organisation that stretches from the very top to the very bottom, and isn’t impacted by how well the company is doing at any particular time. Amazon, for example, is a company that prides itself on its frugality. It’s even one of it’s 14 core ‘leadership principles’. The principle says: We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self-sufficiency, and invention. There are no extra points for headcount, budget size, or fixed expenses.
2. Company Assets
Lease, don’t buy
If you’ve got the money, buying is often better than leasing. Buying an expensive piece of equipment, or even a piece of real estate, can be a good idea, since you’ll eventually own it outright and no longer have to pay for it. You’ll hopefully also be able to sell it at some stage, which will allow you to recoup some of the cost. In the case of real estate, you might even make a profit.
However, when you’re worried about costs, leasing might make sense. By leasing, you won’t tie a lot of cash up into an asset that can be hard to offload, and you’ll improve your cash flow. If you negotiate a good lease agreement, you might even be able to cancel the lease on short notice if it turns out to be too expensive.
Ditch expensive debt
Not all debt is created equal. If you want to save money, look at the interest associated with all the debt in your business. Focus on paying off the most expensive debt with the most unfavourable terms, and place less emphasis on the debt with low interest. This won’t have an immediate impact, but it will save you money in the medium to long term.
Put off big expenses
This should be pretty obvious, but it’s worth stating explicitly: Unless there is a very, very good reason for it, avoid big expenses while times are tough. Chances are, you’ll be able to justify the expense if you try. A bigger store will allow you to service more customers, increased production will result in increased sales, etc. Be firm. Don’t be seduced by what the result ‘could potentially be’. If the impact isn’t guaranteed and immediate, let it go.
3. Production and operation
Examine production costs
You’ve probably heard of the 80/20 principle. It says: Roughly 80% of the effects come from 20% of the causes. For instance, 80% of your sales come from 20% of your clients, or 80% of the truly impactful work done in your organisation comes from 20% of your employees.
Well, it turns out this principle can also be applied to production. There is a good chance that a relatively small number of items are responsible for an inordinate amount of your production costs. It might not be 80/20, but it could be significant enough to warrant discontinuing those items. Look at every line item. Can its continued production be justified financially? This is an exercise that should be conducted regularly.
Tighten your inventory
Chances are, there are systems and processes in place that dictate your company’s inventory management. Only 20 left of item X? Restock. Only 10 left of Y? Order now. If you’re trying to save money, though, you need to fundamentally relook
the way you manage your inventory. Specifically, it’s worth looking at something called just-in-time (JIT) inventory management. First created by Toyota in the 1950s, the JIT principle promotes exactly what its name suggests: Manufacturing and procurement that is tightly aligned with demand. More items aren’t produced simply because ‘it’s the rule’ or because there is excess capacity. Instead, items are created ‘just in time’ to meet demand. What’s good about this, is that it reduces unnecessary production costs, limits the amount of stock you need to house somewhere, and can also reduce labour costs. However, if demand suddenly spikes, or the price of products/materials suddenly skyrockets, you can run into trouble. Successful JIT inventory management is a bit of a balancing act.
Sweat the small stuff
As mentioned earlier, even great systems tend to be quite inefficient when you really start to look at the details. It may seem as if you’ve cut costs in absolutely every way conceivable, but there are almost certainly other expenses that can still be cut. To find these, though, you need to think outside the box. We’re not talking about line items here, but instead about all those small expenses that hide within every individual line item.
In 1987, for instance, American Airlines famously saved itself $40 000 by simply cutting olives from its in-flight salads.
Similarly, when the US economy crashed in 2008, McDonald’s got creative with its Double Cheeseburger. It removed one of the slices of cheese from the burger and called it the McDouble. The saving from removing a slice of cheese from every burger? $15 000 per restaurant per year.
Red Adair was an American oil well firefighter who became notable as an innovator in the specialised field of extinguishing and capping oil-well blowouts. Working in an extremely dangerous industry, he remarked: “If you think hiring professionals is expensive, try hiring amateurs.”
Bill Gates said something similar: “The key for us, number one, has always been hiring very smart people.”
Recruiting a well-educated person with loads of experience will be expensive, sure, but you need to consider what that person can do for your organisation. Hire a great person, and he or she will be able to do the work of two, or even three, people. So if you want to save your business money, don’t try to cut costs when hiring. Instead, hire people who will add a lot of value to your operation.
Send your people home
The cost of an employee is not limited to his or her salary. You probably stock the kitchen with coffee and milk, and the bathrooms with toilet paper, for example. Then you need to consider the costs of all those telephones, computers, lights and air-conditioners. This all adds up very quickly.
With this in mind, a good way to cut back on expenses is to give employees the option of working from home. Even if it’s just one day a week per employee, the savings can be very significant. IBM released a study on working from home (which it calls telework) in 2009 that revealed that the company saves about $100 million every year in the US alone by letting people work from home. The report stated: In the US, continuing annual savings amount to $100 million, and at least that much in Europe. With 386 000 employees, 40% of whom telework, the ratio of office space to employee is now 8:1, with some facilities as high as 15:1.
Cut back on travelling
If your employees are constantly flying to meetings, you might want to look at ways to limit business travelling. You can, for instance, rig out your boardroom with everything needed for high-end tele-conferencing. Large screens and a fast Internet connection might seem expensive, but just compare it to the cost of constant air travel.
It’s also a good idea to look at exactly why and how often your employees travel. If someone is flying to Beijing to sign a huge deal, that’s understandable, but do away with long-distance travel for low-value meetings.
Renegotiate with suppliers
If you’re feeling the pressure, chances are your suppliers are in the same position. This provides you with an opportunity to renegotiate with them. You can even play hardball and try to renegotiate prices. If a supplier is desperate to keep you as a client, there’s a chance that the company will give you a better price.
However, with most organisations feeling the pressure of increased production costs and a weakening rand, there probably won’t be much wiggle room when it comes to price. So what can you try to renegotiate with a supplier? Well, you can try to get your credit extended. In other words, instead of having 15 days to pay a supplier, you could have that pushed to 30 or even 60 days. This doesn’t exactly reduce expenses, but it does free up cash in your business. Amazon does this to great effect, funding its growth by selling goods before it has even had to pay for them.
Conversely, you can also try to negotiate for a discount if you pay your supplier quickly.
Create a buying cooperative
While you can try to negotiate for better prices, suppliers are usually only really keen to offer a reduced rate if you purchase goods in large enough quantities. If you’re a relatively small operation, this can be hard to do, which is why you might want to consider the creation of a buying cooperative alongside other businesses.
A good example would be a small construction company. By pooling resources with similar operations, the owner of a smallish construction business can create a far better bargaining position for himself. Instead of buying bricks and concrete for one operation, he’s now buying for five or ten. With a bigger order comes bigger margins for the supplier, which means lower costs for the cooperative.
Barter, don’t buy
Too few companies recognise the value of bartering. That’s unfortunate, since it can be a fantastic way to save money. All you need is a supplier that also wants what you’re offering. Say, for instance, that you sell office supplies. Well, that’s something just about everybody needs, including your accountant, marketing agency and IT company. So instead of paying outright for all these services, why not try to barter for at least some of it? It requires some creative thinking and good negotiation skills, but it’ll be worth the effort.
Relook your pricing
As mentioned at the start, making money means either selling more or decreasing costs. Well, there’s actually also a third option. While you should focus on cutting costs, it’s also worth taking a look at your pricing. At some stage, increasing prices is a necessity that can no longer be ignored.
Perhaps you don’t need to increase prices across the board, but take a look at what your individual clients are paying. Are some of them perhaps receiving rates that can no longer be justified? Maybe they were huge customers at one stage, but are now also cutting back on expenses.
Get clients to pay quickly
When it comes to suppliers, you want to try and extend your credit. When it comes to your clients, however, you want them to pay as quickly as possible. A good way to do this is to offer discounts as an incentive. True, it’ll tighten your margins a bit, but it’ll also free up cash in your business.
Save on shipping and deliveries
Shipping and deliveries can cut into your profits very quickly if you’re not careful, so it’s worth looking at ways to reduce costs. A good idea might be to invest in a fleet management system that can help you to streamline your operations. It’s an added expense, sure, but it can save you money in the long run. US transport company UPS, for example, implemented routing software a few years ago that reduced left turns to the bare minimum (in the Unites States, of course, turning left means cutting across oncoming traffic). By doing this, the company shaves a massive 20 million miles off its total routes every year.
It’s also worth examining how often you deliver to customers. If you’re worried about cash flow, your clients probably are as well, which means they’re opting for small and frequent purchases, instead of large and occasional ones. So don’t deliver to clients three times every week. Insist that they increase the size of their orders, or else fetch their goods from you.