Cutting costs: where do I start?

Cost cutting illustration

It's never a bad idea to look at cutting your costs. When your business is ticking over nicely, you can keep spending focused on the right areas. And if things are getting tight, limiting expenditure could keep you in the black

Either way, the end of the year is a good time to look at cutting costs in your business. We reveal some of the best places to start.

Think about your people

Although reviewing staffing is a sensitive area, it can deliver the biggest gains in cost and efficiency - even when your business is growing.

Start at the top. For instance, some small companies have a highly paid financial director or marketing director. But is this necessary?

"Often, the reality is that you need this type of expertise on tap," says Conrad Ford, CEO of the multi-award winning company Funding Options. "But for most small businesses, such specialist input is crucial only a few times a year.

"In the area of finance, most of the time a competent bookkeeper and some good accounting software will do the job - whereas the finance director's role should be to make sure it is all set up and running properly."

Use natural churn as an opportunity to review staffing.

"When an employee leaves, you can see how much of what they did was really essential," explains Ford. "Businesses tend to change, but often it's only when someone resigns that you can see what their role really involved."

Instead of rushing to hire a replacement, leave the job open at first. Can other employees refocus to share the most important tasks? Can you hire a more junior person to handle the team's remaining work?

"This strategy can help your staff optimise their work," continues Ford. "Over time, people can become focused on activity rather than results. They do what they've always done, rather than what really needs doing.

"When you give them the confidence to say 'these are the really important things', your workforce will soon be humming along at maximum productivity. And that's one of the biggest cost-savings there is."

Review your suppliers

"Always stick to the golden rule of purchasing," advises Daryl Woodhouse, CEO of business growth consultancy Advantage Business Partnerships. "Get three quotes for anything you buy. That's enough to give you a feel for the market without getting caught up talking to lots of suppliers."

Some of the most rewarding savings can come from reviewing products or services you purchase monthly. Reassess these about once a year.

"Suppliers will ease up their prices without you noticing," continues Woodhouse. "When we get our clients to test the market, they very often find they've been overpaying."

In particular, the value for money offered by services like mobile phones and broadband can fall because suppliers tend to keep existing customers on outdated plans.

You can review these areas by setting some time aside once every few months. Alternatively, find someone who can investigate for you.

"I know one company owner who offered his teenage son £50 if he could find a better deal for their company mobile phones," recalls Woodhouse.

"He saved them £50 a month straight away. Without that intervention, the task of reviewing phone charges probably would have stayed on the company's to-do list for another year."

Jarosław Kacprzak of Future Processing agrees. "To get the best supplier, you should provide a detailed description of your requirements and expectations. A detailed Request for Proposal (RFP) helps potential vendors to know what terms and details they will have to meet and adhere to.

"Over the years, we've received hundreds of RFP's from our clients and there are some good practices that you can follow. We have compiled an RFP template with a list of areas you should cover in yours."

Once you've done your research, give existing suppliers the chance to negotiate. They may be flexible in order to keep your business.

Consider scaling your business

Most businesses actually need to spend money to cut costs. Ultimately, your focus should be on your margins, not how much you spend. Big businesses spend millions but remain profitable because they maintain a sizeable gap between operating income and costs. You should aim to do the same.

Businesses like Plenti point out that sometimes it's worth spending money on a big project that helps cut costs in the long term. For example, you might be able to reduce labour costs by investing in new machinery that does the same amount of work but at a fraction of the price or which helps you increase the number of units you can produce in the same number of working hours.

Simply selling more by expanding the reach of your marketing could also help. Opening new routes to market can give you access to corners of the market you haven't yet exploited.

Monitor the small things

There's only one way to find out where your money gets spent. "Go through your costs line-by-line," suggests Woodhouse. "Your spending can get bloated without you realising."

The sources of this bloat can vary. In the good times, when sales were strong and there was a high risk of good staff being lured away to other companies, perhaps you spent heavily on perks and luxuries that are now less appropriate.

"If you do provide perks, make sure your staff actually value them," continues Woodhouse. "These smaller things can keep employees happy, as long as you're paying for benefits they actually want."

Premises and travel

You may be able to find significant savings in your premises costs.

"When rents are going down generally, you can save a fortune if you negotiate well or move at the right time," confirms Conrad Ford. "But you need to understand the local property market. Consider the disruption of moving, too."

Business travel is another area ripe for savings. "Lead by example, and make it clear what level of expenses is acceptable. When you travel, how you travel and where you stay all have an impact on your bottom line," reckons Ford.

Cost-cutting hacks

Rune Sovndahl is CEO of Fantastic Services, a London company offering domestic services like cleaning, gardening and pest control

He explains how the business reduces costs through a 'hack it better' approach.

Is cost-saving a priority for your business?

"Fantastic Services was born in the recession. We've taken no external funding, so keeping costs down helps us stay competitive."

What sparked your cost-cutting efforts?

"You need the right equipment to clean properly. But we had a problem: our vans weren't big enough to hold a cleaning crew, oven cleaning kit, carpet cleaning machine, plus all the basics likes mops and buckets. We were often sending two vans to jobs, which added significant cost."

How did you identify which areas to focus on?

"We could have just bought bigger vans. But, although that might have saved money in the long term, it would have been expensive initially.

"Instead, we adopted a 'hack-it-better' mentality. We identified that our other option was to change what we needed to fit into each van."

Can you explain what you did?

"Nobody knows cleaning equipment better than the people who use it, so we designed an oven cleaning kit to fit around other equipment. We also contacted the manufacturer of our carpet cleaning machines to suggest how they could be redesigned.

"We've managed to fit everything into one van by changing the seat layouts and buying a custom carpet machine. Problem solved."

What benefits have you seen from cutting costs?

"It's enabled us to broaden the services we offer in this highly competitive market. For instance, we can now provide a guaranteed end of tenancy cleaning service at an excellent price, because we always have the right equipment with us.

"It's not been about shaving pennies off. It's given us a significant business advantage."

What have you learnt from this experience?

"The quickest way to find out if an idea will work is to try it. These days, if we have an idea for improvement we will test it. If it works, we'll roll it out across the business."

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