The following article was shared by Entrepreneur on September 24th, 2022:
Cutting Costs 101 – How To Save Money When Running A Business
Regardless if you’re a small startup or an established corporation, there will surely come a time to learn how to save money and cut costs. This subject is especially relevant…
By Rob Press
Learning how to save money and efficiently lead a business without wasting resources is a valuable skill. Although planning is a must, you often can’t foresee things like pandemic outbreaks, wars nor the financial struggles that follow.
So, how can a business become more resilient in times of trouble? There are some ways to adapt to a possible crisis even before it strikes.
Audit and build a forecast
Based on recent Zippia research, 22% of business startups fail in their first year. Additionally, the main reason for small businesses to fail was connected with cash flow problems. Naturally, a lot of your business success depends on planning your finances and setting your budgeting right.
Analyzing your current efficiency is the first step of every good business plan. So, we’ll start by performing an audit on all back and front-end operations, workflows, and processes.
Your goal at this stage is to simply gather data, and learn to manage your cash flow and expenses. You need to figure out the ROI and the value of every activity. Additionally, you have to analyze your cash flow and see if your payment dynamic is manageable or if you need to change things. The mentioned information will help you isolate the gaps and inefficiencies.
For instance, make a list of your current fixed and variable expenses. Then, see where you can cut costs and optimize.
Once you’ve analyzed your current business operations, it’s time to visualize and plan what you want to achieve. Here’s where you take action, set a budget or a goal, and stick to it.
Use technology to automate processes
Open-source, AI, and cloud technology can be of immense help when trying to cut costs. Many free or affordable tools can help you automate and streamline different operations.
For instance, if you have remote or shift workers, you can try using staff scheduling software to make the entire process more efficient and reduce human errors like overlaps or missed shifts.
Likewise, try to go paperless and start doing business in the cloud. It will give you one centralized data storage location and allow you to allow or deny access to different documents and files for different job roles.
Think of how much you’ll save on storage costs alone by going paperless!
Additionally, automating manual, daily, labor-intensive operations saves time. And, time is money! Data entry is the best example of a time-consuming task you can automate.
In some cases, businesses might be forced to lay off employees due to a tight budget. In cases like these, automation can also help replace human labor whenever possible. Of course, laying off employees equals losing human capital. If it comes to that, learn to adopt technology as an alternative.
With all this said, we have to mention that automation is not always the cheapest option. For instance, automating an entire assembly line in a factory requires a large upfront investment. So, shop around for solutions in advance to have the correct financial projections.
Finally, on the subject of cutting costs, we can’t forget about virtual technology which allowed many companies to operate remotely, especially during the pandemic outbreak. If your budget is tight, use technology like Zoom instead of traveling for in-person meetings. Or, collaborate on Google Drive and Google Meet and sublet your office space. Get creative and take advantage of technology!
Fix your supply chain and ask for discounts
Leading a successful business means constantly observing the market. Your business goal is profitability, so you have to source the best quality product for the most affordable price you can find. Don’t get stuck with the first supplier you started working with if there are better ones on the market.
If the product price goes down and you can find suppliers that offer a better price vs. value ratio, ask your supplier to match the price. Otherwise, give a chance to a different supplier.
Carefully read and compare supplier contracts. In many cases, especially if you buy in bulk, you become eligible for discounts. Don’t be afraid to practice your rights and negotiate the prices.
In the end, getting a better price from your supplier means cutting costs and improving the overall profitability of your business.
However, it’s not just about discounts. If you plan on designing a way to save costs sustainably, you’ll need to fix your end-to-end supply chain. Often, this includes third-party services, fulfillment centers, distribution centers, freight forwarding partners, etc. You’ll need to get creative and find a way to make the entire chain more efficient.
Outsource to reduce overhead costs
When running a business, a lot of funds go toward payroll. Additionally, as an employer, you probably offer a 401K or a similar retirement plan. The setup and administration costs of these plans can cost you a lot. So, it’s worth shopping around to find a provider with lower fees.
Another way you can bring down your 401K costs is to cut administrative costs by having a safe harbor 401K which exempts your plan from compliance testing.
If your budget is really tight, you could reduce the number of employees on your payroll. Instead, try outsourcing to freelancers or third-party agencies. Outsourcing has become popular among big and small businesses with global market size of $92.5B in 2019.
For instance, if you’re a company unrelated to IT and just need a website, you don’t necessarily need a full-time developer on your payroll. Instead, outsource the task to a freelancer or hire an agency to design and maintain your website.
Aside from saving you from high payroll expenses, outsourcing parts of your business instead of doing them in-house will decrease your need for office space and rental fees.
Based on 2022 Zippia statistics:
- 37% of small businesses outsource either accounting or IT services;
- 34% outsource digital marketing;
- 28% outsource development work;
- 24% outsource human resources or customer support work;
If you’ve decided to decrease the number of fixed employees on your payroll, these are some areas you can consider outsourcing. When it comes to the choice of an external partner, you could go for an agency or hire individual freelancers. Do your research and explore to find the most cost-effective outsourcing strategy for your needs.
In the past, traditional marketing strategies like billboards or TV ads didn’t give you a way to capture data and metrics. Today’s digital marketing efforts are much more efficient in terms of ROI due to data and the possibility of learning and making informed decisions. Instead of spending blindly, you can now make more strategic efforts.
Lastly, don’t forget that today it’s all about social proof and native ads that don’t really feel like ads. According to a recent BrightLocal survey:
“77% of consumers ‘always’ or ‘regularly’ read online reviews when browsing for local businesses (up from 60% in 2020)”.
We recommend you find a way to provide an incentive for your buyers to leave reviews. The incentive can be anything from a discount or freebies to store credit or anything else that works for your business model.
The next things we want you to analyze are your subscriptions and the services you’re using. To stop overpaying for services, you need to regularly audit the service and value you’re getting and compare it to other services on the market. Don’t be afraid to go for the more competitive rate or ask your current service providers to match a better offer.
Do you need such a high company cell phone limit? Are you actually using the landline you pay for? Does your bank offer the best deal you could get?
After analyzing all the services you pay for, you’ll cancel some right away and realize you can significantly downgrade others.
Another option is to save by getting annual instead of monthly contracts. Most subscriptions come with a discount for annual licenses. If you can afford a slightly higher upfront investment, this will save you money in the long run.
Perfect your stock levels
According to a Statista global out-of-stock product breakdown grocery products, and perishables record the highest out-of-stock value, with 45.5% and 38.9%, respectively. These two product categories are followed by health and beauty care.
Furthermore, 2021 Adobe research shows that when compared to a pre-pandemic period (January 2020), out-of-stock messages have increased a whopping 250 percent during the pandemic (in October 2021).
These stats clearly show the losses your business incurs from improper inventory management. Nobody wants to deal with out-of-stock scenarios, backorders, or the opposite, a warehouse full of dead stock and no interested buyers. Better inventory management means better finances, so optimizing your stock levels is what you’re going to aim for at this stage.
Recent estimates show that retailers were working with around 70% inventory accuracy in 2020. There’s certainly room to improve. Looking at historical sales data and analyzing the current demand, trend, and product lifecycle can give you a good idea of your sales projections. Take these numbers into consideration when deciding on the size of your order.
If you can become more agile and use third-party fulfillment or distribution centers, or even adopt drop shipping as a low-risk business model, you can significantly decrease your storage costs.
Hire a tax consultant
Last but not least, we recommend working with a tax specialist or a tax accountant who is well-versed in laws and regulations and can help you file taxes correctly and get a favorable tax return.
Small businesses often overlook the importance of a professional guiding them through this area thinking they will save costs. On the contrary, this often ends up costing them more due to improper tax filing or not claiming everything they could’ve.
However, note that your tax consultant or accountant will also charge you billable hours. So, that’s also an expense you’d want to track. Ideally, the savings and value they provide should match their fees.
Ideally, a good tax accountant should bring you many benefits in terms of cost savings:
- Saves you time and lets you focus on more important business aspects.
- Helps you avoid costly mistakes and navigate the complex tax process.
- Helps with tax preparation and filing.
- They can spot tax-deductible expenses you might miss otherwise.
- They keep you updated and compliant with tax laws and regulations.
- Can provide general financial expertise and advice.
Proper financial management is crucial for the overall success of your business. However, note that being thoughtful about your expenses should never come at the cost of your service or product quality.
Saving money and cutting costs in the business climate today requires companies to go through digital transformation and implement technology to find faster, better, and more efficient ways to reach their audience while remaining profitable.
We urge you to use this technology at your disposal to track your expenses on an ongoing basis. That’s the only way to prevent unnecessary expenses and cut costs when the budget is tighter. Hopefully, we’ve managed to help you learn how to save money in creative ways and remain profitable even when things are tough.
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