Cutting Costs in Business
By Peter Jason Riley
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 ten ways you may be able to cut costs in your business.
- 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 the sales staff is compensated on gross sales generated, consider changing
the policy to account for the quality of sales. (Consider paying commissions on
the gross profit in a sale.)
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.
- Payroll costs are a major item in most businesses. Perhaps a more
efficient plant layout would result in reduced labor needs. Similarly,
automation should be explored where practical. 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 seasonal
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
- Review telephone and postage costs. Are all telephone calls necessary
and is the telephone being used effectively? Can money be saved by alternate
shipping and receiving carriers?
- Consider getting rid of company-owned autos. With the extended
depreciation periods, it takes longer to recover their cost. It may be easier
to reimburse your employees for business use of their personal cars.
Alternatively, consider leasing the vehicles.
- 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
- Analyze inventory levels. Determine if any obsolete inventory can be
reworked or sold for salvage.
- 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
- Review purchasing policies and costs of supplies, product, or raw
materials. Compare prices of other suppliers. Switch suppliers where
appropriate, or renegotiate for better prices with your current suppliers.
- Using prior financial results as a guide, prepare budgets and long-range
projections. Actual results should be compared to these projections to
highlight areas needing attention before material problems develop. Budgets and
projections can also be used to determine the impact of proposed changes in
sales, gross margins, and expenses before they occur, allowing you to act
instead of react.
- 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.
The important thing is to critically review your expenses periodically. 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.