How to reduce business expenses

There are two things that can support a company during a difficult period: sales and cost management. The profitability of the company and its sustainability depend on how competently a business manages expenses. First, you need to collect all the data on expenses and conduct an in-depth analysis that will help you make the right decisions in order to understand what expenses in your business can be managed at all. In times of crisis, you need to optimize spending, especially carefully, so as not to accidentally reduce profits.

The importance of cutting expenses

An enterprise has only two ways: increase profitability or reduce costs in order to maintain stability in the market. The second option is more acceptable. Every company has something to optimize. For example, find more cost-effective production methods or switch to a new payment schedule with suppliers.

It is important to understand that optimization does not come down to simply reducing a company’s costs. Imagine that the owner of a flower shop decided to open a sales point in another area. Will saving on rent help improve profits? It’s not a fact that the citizens of the area are the target audience of the company.

The manager’s task is to find a way to distribute expenses that will be profitable in current market conditions. Simply put, improve production processes without losing product quality.

Ways to cut expenses

The less money a company spends on its work and the more profit it makes, the more efficient the work. But if you cut expenses without thinking about how it will affect the business, you can also cut profits. You need to have an idea how each expense influences the company’s performance. The first step of saving is to review your company’s current spending. It will help you find areas where you can save money. Analyze the payments: from the largest ones, such as office rent and employee salaries, to the smallest ones, such as office supplies. There will probably be ways to save money without harming your business.

Main methods:

• Review of suppliers. Check out offers from different suppliers. Perhaps you will find more favorable conditions that will help reduce production costs. Compare prices, quality and conditions to choose the best option. Sometimes even a small discount from a new partner can lead to significant savings in the long run.
• Automation and optimization of processes. Find tasks that can be automated or improved to speed up your work. For example, using warehouse management software will reduce manual labor time and minimize the risk of losses.

Note: Advanced Order Export offers automated reports on orders in WooCommerce. Read more about its capabilities in article “Advanced Order Export vs. Traditional Reporting: Which Is Right for Your Business?”

• Increased employee productivity. Employees are an important resource of the company; their effectiveness depends on their motivation and working conditions. Efficiency often suffers from poorly designed work processes. Make sure employees have and use task management tools. It is also useful to collect eNPS once a year or quarter to know the mood of the team.
• Inventory Management. If there is no system for accounting for goods, the company may spend more resources on storage than necessary. Keep track of the number of goods in stock so as not to buy too much or run into shortages. Conduct periodic inventory checks and consider implementing a system to track items to reduce losses. Inventory can be managed using different methods.
  • Fixed inventory method: always maintain a certain amount of goods in stock.
  • Fixed order period method: place orders at regular intervals.
  • Fixed order method: place an order when inventory levels reach a certain point.
  • Combined method: This method combines elements of the previous methods.
• Improving marketing efficiency. Advertising brings customers, so cutting money on it is a dangerous way. However, you have to strive to reduce the cost of attracting one client. Selecting effective channels and increasing the budget in them can help with this. Here are some of the channels:
  • Social media. Using them will help increase brand awareness. This may be free or inexpensive, depending on your strategy.
  • SEO (search engine optimization). To attract more visitors, you can improve your site’s visibility in search engines.
  • Email marketing. Sending regular emails to customers with information about new products, promotions and other news can turn new customers into regular ones.
  • Contextual advertising. You can place advertisements on websites that your potential clients visit.
  • Partnership programs. You can cooperate with other companies to mutually promote goods or services.
  • Event marketing. Attending events related to your industry can increase your brand’s visibility and attract new customers.
  • Content marketing. You can create useful and interesting content for your clients. For example, blog, video, infographic.

The effectiveness of each method depends on the target audience and industry. Different approaches and analysis of the results will help you better determine which ones work best for your business.

Difference between optimization and reduction

Optimization and expenses reduction are two different approaches to financial management. Downsizing usually means simply reducing your overall spending. This may include reducing the number of employees, reducing salaries, or eliminating unnecessary services or products. However, such an approach can lead to negative consequences, for example, a decrease in the quality of products or services, or a deterioration in the moral climate in the team.

Optimization focuses on increasing the efficiency of resource use. This may include improving processes, automating tasks, and reallocating resources to maximize profits. The goal of optimization is to get more value out of the same or even less cost without sacrificing quality.

Indicators for business performance analysis

Analysis helps you understand the current situation of your business and make decisions to increase its efficiency:

• share of expenses to revenue;
• dynamics of expenses and income;
• competitor indicators;
• accounting and management reporting.

Note: Even a marketing strategy needs to be analyzed in order to identify weaknesses and eliminate them. You can find an example of analyzing a marketing hypothesis in our article “Halloween Sales Analysis”.

Already in the process of collecting information, you can find a lot of interesting nuances and opportunities that indicate how a business can reduce costs. For example, find new tariffs and conditions with service providers, attract alternative partners. This analysis gives the entrepreneur a complete picture of business expenses and the ability to manage them.