Controlling your expenditure is vital to your long-term success as a business. This is especially the case if you’ve expanded rapidly. While boosting sales is understandably a focus for most small businesses, the fact is that a penny saved is just as good as a penny earned with regards to profitability. A sealed and efficient ship is one that’ll fare better when it finds itself steered into stormy economic waters.
A business with lower operating costs is always going to be at a competitive advantage against those with high operating costs. Consequently, you’ll find yourself in a better position to gobble up market share if you cut costs before the tough times arrive.
Cost-cutting, when done right, should not be a one-off intervention. It should be an ongoing process. Regular reviews should be used to inform and drive the action that you ultimately take. Let’s think about exactly what that action might consist of.
Deciding where to cut costs
In the late 19th century, Italian economist Vifredo Pareto put his name to a principle that would become ubiquitous in modern thinking. He noted the way that land was divided in his homeland: 20% of the population owned 80% of the land. This was further generalised to the principle that most outcomes come from a small portion of causes.
When you’re thinking about cost-cutting, the Pareto principle should help you. 80% of your costs are, in all probability, being driven by 20% of your cost-generating activities. During your cost-audits, you should be looking to focus on these factors and how you can reduce their costs.
Think about costs that don’t directly drive profit
Some of your costs are indirect. Which is to say, they don’t have an immediate impact on your ability to generate profit. You might put your heating or employee travel costs into this category – you are less likely to impact your sales and profits if you focus on cost-cutting in these areas. For instance, if you’re able to find a cheaper way to source car tyres for your company fleet, you’ll be able to cut costs without impacting your final product or service.
Focus on your core offering
A bloated line of products and services can lead to a lack of focus and swelling costs. Think about the things you’re selling and what’s driving your profitability and growth. Ask what your business is there to do because you may lose sight of it once you start expanding. It’s important to innovate and to be prepared to fail, but once you’ve established that a certain idea isn’t working, drop it and focus on what is working.
Update your old systems
Businesses are often hesitant to upgrade to new systems, particularly ones that are technological. They may need investment up front, but the long-term benefits will support your sustainable growth. For example, if you’re using an onsite server to store all of your data, then you’ll have the electricity and storage costs which come with maintaining the hardware. Making the switch to a cloud-based alternative would alleviate this and save your business time and money.