Cutting costs is arguably the quickest and easiest way to improve profitability. Yet most of us put all our efforts into selling, which is highly unpredictable.
This was a subject discussed recently by the members of the Business Exposure Group which verified the research data that 40% of business owners claim they do not have time to shop around for the best deal.
Those of the members who felt that they had control of costs looked carefully at their monthly profit and loss and compared with the last two years, to evaluate each expense and understand which costs have increased and which are currently unnecessary.
One of the members had specifically employed a purchasing manager to obtain the best prices across the business. Although that appeared a sensible route, the process had backfired because the suppliers where ‘screwed down’ so much that few wanted to do business with the company. The purchasing manager has now moved on, but the company’s brand has been damaged.
Clearly cutting costs across the board is not helpful. The best way is to think through restructuring the business to take advantage of current market trends.
Almost every cost cutting has a potential downside, but if you can benchmark your business against other SME businesses in your sector on costs then you will be able to understand whether you are throwing money away. This information can be obtained via trade organisations or employing third party consultants who know the market thoroughly and operate on a no win no fee basis.
One of our members has a significant cost reduction business and he is astounded at the number of sizable organisations he visits where the MD’s personal assistant is in charge of cost control. His view is that if you want to make money straight to the bottom line, then become more excited about saving money than spending it.
One of the biggest cost issues is shoddy work. Most business owners treat money like its limited and time like it is limitless. But everytime an order goes out wrong, or an invoice needs correcting, it represents re-work. So you are doing the job twice but only getting paid once.
Another way of reducing costs is to ask your customers about costs, eg how to take wasted steps out of the process, or how to plan jointly to smooth production. Many of our members provide products and services with too many ‘bells and whistles’ which are not required by the customer. So, if you have a joint discussion this will deepen relationships, show the customer you care and help reduce costs for both parties.
Whilst the members saw the benefits of having a limited number of suppliers it was agreed that all products being supplied should have at least a 10% fall back supplier to allow flexibility if your main supplier becomes greedy or unreliable.
It is important to renegotiate all contracts annually. Do not allow a contract life to be more than one year because a multi-year contract will usually be in favour of the seller, and even worse allowing a contract to hold over after it has come to an end is expensive.
Other points raised included:
1.Employing ‘just in time’ delivery, so that you carry very little stock.
2.Plan to make major purchases such as machinery and vehicles in advance, so that there is plenty of time to get a good deal, rather than negotiating in desperation at the last minute.
3.Avoid making frequent small orders.
4.Outsource non-core activities wherever possible.
The subject of staff costs opened up a whole extra agenda, one which we will visit on another occasion.
In conclusion, every pound saved goes straight to the bottom line. Don’t become obsessive but review regularly so that you can use some kind of systematic cost control.