Cost Cutting Strategies for Businesses
While running a growing business — operational overheads make up for a huge part of the businesses’ costs. These costs offset the revenue and profits your company generates. For example, restaurants being a capital-intensive business were observed to generate a mere 2% net profit.
Being a growing business, higher costs to run would cause a cash burn, which severely impacts future growth and runway. Low or no operating profits are detrimental to the health of a business, and if not addressed, might cause shutdowns and bankruptcies.
In this article, we’ll discuss cost cutting techniques for businesses, so that they can operate profitably.
Why Operating Lean and Cutting Costs Matter
High operating costs can weigh down a business by eating up profits. Apart from that, when the business does poorly and doesn’t generate enough revenues as per expectation, higher costs can lead to distress and ultimately, failure. The COVID-19 pandemic which caused demand to plummet has caused around 100,000 businesses to shut down temporarily and serves as the cautionary tale for capital and resource-intensive businesses.
Cost-intensive businesses also drive up the prices of their products, which can often make them lose to their competition in the marketplace. Lean businesses can transfer the cost savings to their customers, while staying profitable and competent. Higher profits and demand fueled by lower costs thus enable companies to grow, without having to overspend on marketing.
Now that we’ve learned how important cost-cutting is, let move on towards exploring cost-cutting strategies that’ll help you grow efficiently.
8 Effective Cost Cutting Strategies for Businesses
1. Go remote
If you’re operating a business that involves knowledge work and isn’t the location or geographically dependent, you can opt to be remote. With everyone having access to computers and the evolution of modern work collaboration and communication tools, knowledge workers can work from pretty much anywhere. Going remote would mean you can save costs to rent and maintain office space.
Apart from the company being able to directly save expenses on rent and maintenance, companies also experienced a boost in team productivity. As per a survey by BCG, 79% of professionals have been able to maintain or improve productivity while working remotely, while skipping the need to commute. Team members also gain in terms of flexibility in work timings, getting to spend more time with families, eating healthier food, etc.
2. Be financially transparent and track expenses
As part of your cost-cutting initiative, take a good look at your business expenses. These could include expenses like the use of software and professional tools, reimbursements for food, travel, internet access, entertainment, etc. Typical reimbursement and procurement is carried out using company credit cards for convenience and depending on how many people use it, it can often end up costing you more.
Make transparency and accountability part of your company’s operating structure. Build a narrative or vision around running a lean, profitable and fast-growing company for your team to follow. And in line with that narrative, every expense should be evaluated against its utility and return on investment. If it doesn’t really serve a purpose, stop making and approving similar expenses. Limit the number of people with access to companies’ credit and resources, and select few with it should be given additional ownership and responsibilities.
Neal Taparia, a serial entrepreneur who runs a classic game and brain-training platform Solitaired, has always reviewed in detail his company’s expenses:
“Over time, you add services and costs that you forget about, especially as your team gets better. That’s why you need to regularly ask your team if you’re getting enough value from these services. Time and again you’ll find that you’re paying for products or services unnecessarily and can save on costs.”
3. Exchange services and barter with other businesses
Another way to cut down costs and expenses is to partner up with other businesses where either of you could make use of the other’s product. This way, both parties can make use of each other’s products for essentially free, something they might have otherwise paid for.
When making such exchanges or deals, emphasize on generating value for both businesses. Apart from using each other’s products, you could also tap into each other’s audiences (i.e., co-marketing) to offer deals on your partners’ products. This way, your customers get a better deal if they are interested in your partner’s product and your partner acquires a new customer — the same will be the case vice versa.
4. Tie employee incentives to results
As your business grows, so will your team. A larger team gives way for complacency and is likely to drive down average productivity. This is because they have an employee’s mindset — which promotes risk-averse behavior that lacks urgency and accountability. They don’t have incentives to do otherwise. Their income is guaranteed, which is why they don’t push themselves to perform like an owner. It can get counterintuitive for a business to provide guaranteed income (which is a cost) for operating a team that doesn’t consistently bring results.
To counter this, let your employees have “skin in the game,” i.e., aligning their income with the outcomes and results they generate. You can offer them stock options, profit share, incentives, etc., as part of their salaries with a lower fixed cash component. It’ll help you to reduce your downside on periods when your team (and business) don’t perform well.
5. Hire quick and retain the best
Based on which industry your business is in, hiring talent could get tough, and competitive. Hiring is one of the most crucial parts of your company’s early growth as early team members will be the ones to set up your business for growth and scale. If hiring in your industry is competitive, being a growing company would make it even tougher to hire talent. And the longer it takes to hire key members in your team, the more money you’ll lose by having projects slow down or stall.
Hence, it is important to build a brand around your business that attracts good talent. Treat your business as a product itself, so it attracts good candidates when you need them. Also, take steps to retain good talent (offering company stock, raises, etc.) to ensure you don’t lose on a critical part of your team, which if happens, will require you to hire again. Replacing old, high-performing members of the team has tangible and intangible costs associated with it, which is why retaining them should also be a priority.
6. Switch to cloud-based tools and services
In the early stages of your business, selecting tools, systems and services will make up for a crucial part of building the company. What tools and services you choose during this time as part of the company’s day-to-day operations could define how much costs they drive. If you’re using traditional systems and processes, chances are, they can probably be replaced by a computer, using cloud-based applications.
In recent years, cloud-based apps have risen in popularity and made it cheaper and easier to operate businesses. For example, using tools like Slack and Zoom instead of a Phone is cheaper + quicker for team communications. Similarly, hiring contractors from services like Fiverr is cheaper than having to hire a full-time role or hiring a part-time college student online for the same tasks. You can reduce your support costs and cut down your support tickets up to 80% by using a knowledge base. Find such alternatives to your operating processes and it will help you save significantly over a long period.
Monika Adarsh, senior product marketing manager at Beaconstac, says:
“As an early-stage startup, we always try to bring in an experienced contractor before scaling up the in-house team for a new project. It’s not only a cheaper option than working with an in-house team but it also helps them assess the feasibility of a bigger in-house team later on and learn from the experiences of the contractor.”
7. Negotiate discounts on operating expenses
Regular expenses will make for a huge chunk of your quarterly costs. This might include things like server bills, office rent, cleaning services, plumbing services, etc. As you grow over time and stay with these vendors or businesses as regularly paying customers, consider negotiating for discounts and price cuts. You might not realize this — but these vendors would rather give you a 10% discount on your monthly payments, than lose you altogether. The majority of customers don’t ask for such discounts, but it’s probably possible, if you just ask for it.
8. Opt for government incentives and tax write-offs
Taxes take up a significant chunk of your profits, based on your geography. If your business is still in the growth stage, you might not be generating enough profits or revenue for significant tax bills. But some countries allow write-offs on future profits from current losses, i.e., losses from this year can be carried over and be written off against next year’s profits. Make sure you’re recording your losses and expenses as part of your accounting, so you could possibly use it for write-offs in the future.
Apart from this, country and state governments also have programs that help startups and businesses to grow. This can be in the form of cheap or interest-free loans, grants, subsidized use of land, lower taxes, etc. Find such programs and leverage them to lower your operating costs and expenses.
Cost Cutting Strategies for Businesses
Cost-cutting is an essential exercise — not just for growing businesses, but for corporations as well. And as we discussed, most of it comes down to setting up the right incentives for your team members, hiring the right team members quickly and using the right tools. But smaller measures like bartering and co-marketing with other businesses, negotiating for discounts with vendors, tax write-offs, etc., also help you save costs in small measures. Doing so helps you operate the business lean, offset low margins and profits, whether in bad economic conditions and grow sustainably, which is highly essential for a growing business to thrive.
More than that, you can review your business processes and see where your time and money goes with tools like time tracking software. For example, in actiTIME, you can distribute the workload across your team, get them to track time and see how time and costs are dictributed across employees, tasks, projects and clients. With time and cost reports, you can identify time and cost sinks and maximize your profits. Try actiTIME with a free 30-day trial (no credit card required).