Improving your bottom line isn’t just about increasing your revenue. It’s also about reducing expenses where you can. Lowering direct costs can dramatically increase your profit on each sale while eliminating unnecessary business overhead. Let’s look at what to consider when optimizing operational costs.
Lower the cost of purchases
Reducing what you pay for raw materials, components, or employees who work directly on output will have a significant impact on cost optimization. This is assuming that you can maintain the quality and service your customers expect. List your direct costs from the most to the least, select the top ten and then see if you can:
- Source cheaper suppliers. If you’ve been buying from the same businesses for some time, it’s often wise to explore whether anyone else can sell what you need at a lower price, for the same or better quality.
- Ask existing suppliers to renegotiate deals, offer early payment discounts, or review more favourable terms. If you haven’t queried costs for a while, it’s never too late to ask.
- Buy in bulk, which often brings volume discounts. Then consider where you can streamline expenses through larger but less frequent purchases.
- You may also wish to consider whether switching out one ingredient or component for a more cost-efficient alternative is an option, as the impact to customers may be minimal.
- Identify which of your products or services offer the slimmest margin for your business. Investigate if there is an alternative option, such as outsourcing or the use of contractors on an as needed basis.
- Change your product mix or reduce selling the things that are expensive to service or produce. If you can sell items that cost less to make or deliver, all things being equal, you’ll save costs.
- Use any group discounts from chambers of commerce or industry groups. For example, association membership often provides supplier rates that are beyond the buying power of individual businesses.
- Look offshore to see if importing products or services will lower any direct costs
Lower the cost of expenses
At times it’s possible to lower your overhead while still operating effectively. You can reduce purchases, rank your most expensive overhead costs in order and then start working your way down – applying cost-saving tactics in areas where you’ll see the most reward.
You can try:
- Sub-contracting instead of having full-time overhead.
- Delete a product line or service if it’s sold infrequently and is expensive to maintain or hold.
- Audit your operations to spot wastage from inefficient processes or shrinkage from theft or poor management of consumables.
- Switch manual processes to digital operations to cut down on things like paper, printing and stationery, not to mention labour and the cost of inefficient workflow. Look at how you can potentially streamline your business through digitization or automation.
- Pinpoint inefficient costs such as cutting down on energy costs or getting rid of obvious overcapacity, such as un-used phones, subscription costs and computer equipment.
- Measure the impact of advertising and the return on your advertising spend. What may have worked in the past may not be bringing the returns it once did, and your marketing budget could be more beneficial if used in other channels with a more strategic approach.
- Get smart about your tax bill by claiming every eligable expense to reduce the amount of tax you have to pay. Work with your accountant to understand what you can claim, and make sure you keep all necessary documentation (good accounting software can help with this).
Carefully examining and streamlining your overhead costs helps you improve efficiency and free up resources.
Refinance to lower costs
Find out if it’s worthwhile to re-finance or amend how you bank. Also talk to your Coast Capital Business Advisor or accountant about whether leveraging house equity or selling other assets may be a better way to refinance other debt. Business loans generally have higher interest costs than personal loans, so using personal cash to pay off debt may work out to be a more economical option, long-term.
Harness technology to track and measure
Implement online accounting software to monitor your budget, track your payments and give visibility over your financials well before tax time. Put robust systems in place that are checked frequently, such as using regular cashflow forecasts, implementing clear payment terms and a robust payments process using online banking, so you can catch inefficiencies early.
Call on your advisors
Lean on the expertise of your accountant or lender to help keep you accountable to financial targets, highlight any areas of concern, and give you systems and benchmarks to keep you on track. Regularly taking the time to review processes and activity within your business can help you reduce costs, while still maintaining your brand integrity and the quality of your service.
Next steps
- Benchmark your business against other, similar companies to check your performance to industry standards. For example, your wastage levels might be higher than the industry average, which presents an opportunity to implement cost-saving solutions.
- Talk to your staff and get them involved in ways to cut costs. Give them an incentive to suggest cost-saving ideas and ask what causes them problems or wastes their time. Employees are more likely to co-operate with cost-control initiatives if you explain the reasons for changes and the benefits to the business.
- Find out if there are any bulk buying industry groups to join.
Taking time to optimize your costs improves profitability, enhances operational efficiency, and helps you allocate resources more effectively. Connect with a Coast Capital Business Advisor to discuss your options further.
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This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
