How to cut costs in small business


1st May, 2021

Cost cutting: 15 ways to lower costs in your business

Running a small business often means working with small margins. Smaller margins require keeping a diligent eye on company expenses and cutting costs when needed.

Cutting costs might sound like a straightforward task. But doing it the right way requires a considered approach that takes the entire operation into account.

What is cost cutting?

Cost cutting in a business is any measure taken to reduce expenditure and improve profitability.

In a larger business, cost-cutting activities often take priority during financially stressful periods or while there is an economic downturn. 

But for a small business, keeping an eye on costs and diligently trimming where possible can mean the difference between success and failure. 

15 cost-cutting strategies

The first step of any cost-cutting exercise is to compile a list of expenses in the previous 12 months. This includes costs for 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, consider which expenses can be managed better, or completely avoided, in order to cut unnecessary costs.

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.

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.

READ: Remote work is working

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.

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While not all staff will welcome a change, it may be worth having a conversation about it and understanding your options.

3. Consider outsourcing

Instead of paying a fixed monthly wage to a full-time worker, outsourcing offers a business the benefit of spending only where and when needed, giving more control over business activities.

Research has also shown outsourcing is particularly cost effective for small business owners as they are relieved of the need to pay operating costs associated with worker’s compensation schemes, health insurance, payroll taxes and office space (be sure to comply with the letter of the law for your region).

READ: Tracking expenses: How to keep track of business spending

4. Barter

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.

5. Review 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.

READ: 6 ways to maintain a great supplier relationship

“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.

6. Shop around for lower premiums

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.

7. Buy secondhand

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.

READ: What are fixed expenses for small businesses?

8. Avoid late fees and interest payments

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. In some cases, vendors and suppliers even offer small but meaningful discounts to clients who pay invoices ahead of schedule.

9. Lease equipment

Making smaller regular payments to lease equipment rather than paying a lump sum upfront to buy means that you can more easily manage your budget.

Other advantages include being able to quickly and easily update to the latest equipment and saving money on repairs – the leasing company is usually in charge of fixing and maintaining equipment.

In most cases, you should be able to claim your leasing costs as a tax deduction each year.

10. Avoid travel

Travelling to see suppliers, attend conferences or meet with clients can really make a dent in your budget.

Cut the cost of communications and travel by using email, internet calls (such as Skype or Teams) or teleconferencing (like Zoom or Google Meets) whenever possible.

11. Don’t overspend on marketing

Make a note of all the marketing and advertising activities you have trialled and measure the return on each individual activity. If it’s not working effectively, eliminate it. As well as saving the money spent on the advertising or marketing itself, you’ll save on your own time in managing it.

12. Use time-tracking tools to eliminate waste

As the saying goes, time is money. Make sure you’re not squandering your – or your team’s – time on the wrong tasks.

Use an easy time-tracking tool to assess where your time is going. If there are activities that don’t yield a return, ditch them.
Use time-tracking tools to eliminate waste.

13. Check every invoice

Go through each supplier invoice with a fine-toothed comb to check for overcharging. Common examples are double billing, incorrect charges and missing discounts.

14. Reconsider your product range or service offering

Sometimes, when starting out, businesses overcater to their market. Consider which products or services yield the best return and eliminate those that don’t deliver results.

In the case of products, assess which items generate the best return per unit. Trim back your product range and increase production runs accordingly.

15. 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.

READ: Invoice vs receipt: Key differences and FAQ