The ultimate guide to cutting costs in small business
Running a small business often means working with small margins. In turn, smaller margins require keeping a diligent eye on company expenses and effectively cutting costs when needed.
Cutting costs might sound like a straightforward task, but when done right, requires a considered approach that takes into account the entire operation.
The first step of any cost cutting exercise is to compile a list of expenses in the previous 12 months. This includes costs for your office space, staff, office supplies, general disbursements, insurances, transport costs and supplier costs.
Thankfully, if you use online accounting software, this list can be created with just a few clicks.
Once you’ve listed everything, you can then start considering which of these expenses can be managed better or even better, completely avoided, in order to cut unnecessary costs.
1. Review your space
When starting out, many business owners get excited at the chance to have their own space. Office spaces are often larger than necessary, and it’s a good idea to consider whether you can downsize your space, negotiate a better deal with your landlord, or move to a co-working or hot-desk setup instead.
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In addition to saving on rent, operating your business from a smaller venue or shared space can save a lot of money on insurances and utilities.
2. Cut payroll costs
For most businesses, the largest expense each month is payroll. While downsizing your payroll may be a confronting or unpleasant experience, it can be an essential part of sensible cost cutting.
The first step is to audit each individual’s payroll expense and compare that with their activity. Are all staff contributing to company profits? If there are staff who are underperforming, it might be time to let them go.
If laying off staff is not the right solution for you, there are other ways to trim payroll expenses without resorting to staff cuts. Many employees are happy to switch to flexible working arrangements including a shorter work week, work from home days or even changing to freelance.
Depending on the size and complexity of your business, you may find efficiencies in outsourcing payroll, or from making use of advanced payroll software.
While not all staff will welcome a change, it may be worth having a conversation about it and understanding your options.
While it’s not a common method of modern business, bartering has been an effective method of exchange since time began. If your business has excess capacity, there may be an opportunity to look for a mutually beneficial exchange with another small business.
For example, if you have spare desks in your office, there may be a virtual assistant who would be willing to help you one day a week in exchange for a whole week of hot-desking.
For bartering to succeed, both parties need to formally agree to the terms in advance and then fulfil their obligations.
4. Cut supply costs
If you are running a business that makes supply purchases, getting the best deal on your supplies will make a huge difference to the bottom line.
Perform regular audits on your supply costs by checking them against current market costs and investigating alternate sources. While it can be uncomfortable, you should never be ashamed of asking suppliers for discounts, or to beat prices you find with their competitors.
“Co-opetition” is another way of reducing supply costs. This involves finding similar businesses and pooling your resources in order to save money on supplies and goods. The concept can be extended to all aspects of business, from sharing office space and staff members to production and freight costs.
5. Lower expenses
While expenses such as payroll and rent take up a huge chunk of your monthly budget, don’t forget to pay attention to the smaller expenses which often fly under the radar.
As a business owner, you should perform an annual review of your insurance requirements. Sit down with an insurance broker and discuss all aspects of your insurance coverage and have them shop around to get the best deal. There can be surprising differences in rates for the same coverage offered by different insurance providers.
When something breaks, consider replacing it with something secondhand. Cars, computer equipment, furniture and other specialty equipment can often be found in almost new condition, without the hefty price tag.
Monitoring unnecessary expenses such as late fees or interest payments may sound like a drag but can avoid money being wasted.
Paying bills on time and keeping your credit debts as low as possible will help you minimise any interest or late payments.
6. Maximise deductions
Minimising your tax bill can often mean maximising all available deductions.
A great way to ensure no deductions are missed is to link your bank account with your accounting software. This forces you to consider and allocate all transactions, making sure even the smallest of purchases doesn’t slip through the cracks.
But perhaps the most important way you can get the most from your deductions is to consult closely with a registered tax agent and advisor.
Gone are the days of simply dumping a box of receipts off at your accountant’s office once a year. Your accountant should be willing and able to provide the advice you require to reduce costs before you run into financial mischief.
Cost cutting can feel tedious and sometimes painful in small business, but persistent diligence in this area will make a huge difference to your profits and increase the chance of your business’s longevity.