Too often businesses emphasize increasing sales as the only way to boost
profits. Cost-cutting, when done selectively and intelligently, can be a
faster way to higher profits. "Trimming the fat" should continually be on
every business owner's or manager's mind, and a serious cost-cutting
review should be conducted every year or two.
Here are nine
ways you may be able to cut costs in your business.
1. Look at gross profit margins. If the
margin has been deteriorating, find out why. Determine if increases in
direct costs can be passed along to the customer. Analyze the product to
see if it can be reformulated or redesigned for cost savings.
If you sell
a number of different products, determine their individual gross profit
margins and their mix. Give particular attention to low-margin products to
see if it's still worthwhile to carry them.
2. Payroll costs are a major item in most
businesses. Perhaps a more efficient plant layout or automation
would result in reduced labor needs. The initial investment may be costly,
but more than offset by future payroll savings. Consider the use of
temporary employees and subcontractors if your business is subject to
Payroll-related costs are fertile areas for cost reduction. Fringe
benefits can easily amount to 25-50% of direct payroll. Review employee
classifications for workers' compensation insurance. Improperly classified
workers can be costing you significant premiums. Review group insurance
programs. Solicit bids for the programs every three years. Consider higher
deductibles as a means to lower premiums.
3. Review telephone and postage costs.
Are all telephone calls necessary? Is the telephone being used
effectively? Can money be saved by alternate shipping and receiving
4. Review credit policies. The longer it
takes to get paid, the greater the risk of loss. The 80/20 rule states
that 80% of your revenues are generated by 20% of your customers. If this
is the case, it may be wise to review the other 80% of your customers to
see if you can continue to serve them cost-effectively. Otherwise, your
time will be better spent soliciting new customers.
5. Analyze inventory levels. Determine if
any obsolete inventory can be reworked or sold for salvage.
6. Review fixed assets. Consider
disposing of excess machinery and equipment. Determine whether it would be
better to buy or lease major assets, especially those subject to rapid
technological change and those assets used infrequently.
7. Review purchasing policies and costs of supplies,
products, or raw materials. Compare prices of other suppliers.
Switch suppliers where appropriate, or renegotiate for better prices with
your current suppliers.
8. Enlist the aid of employees by soliciting
suggestions on cost reduction. Many companies have generated
significant savings using this approach. To encourage participation,
consider implementing a bonus program based on a percentage of costs
saved. Be wary of "quick fixes" that will have no impact, or worse, prove
costly in the long run.
9. Review your expenses on a regular basis; don't wait until a
financial crisis develops. Avoid the temptation to make across-the-board cuts, because rarely do all
areas of the company contribute equally to its success.
© This material is copyrighted 2011