All business owners know that there is an ebb and flow to owning a business. At times, your business is kicking butt making a ton of profit, and at other times your looking at ways to cut costs and stay afloat. The trick is to even out the disparities and keep the costs at bay while keeping the income high so that there’s always a profit, and best case a good profit, the majority of the time.
To keep the profits up and costs down, you need to keep a careful watch on your ratios including your income versus expenses, profits versus sales, and sales versus overhead. And if you see negative changes, you don’t want to wait to take action until it’s too late and you’re in a death spiral of doom headed towards collections, bankruptcy, or closing your business.
In addition, being proactive on making improvements that keep you in the black will keep you from having to do layoffs, implement drastic strategies, and introduce policies that could damage your company culture which in turn can lead to a decrease in the quality of products and services, and increase customer turnover. All of which will not help keep the profits coming in.
As a proactive and successful business owner, you will need to implement a systematic approach to managing costs in order to create long-term value for your business, your employees, and your customers. Below are some basic methods of implementing that approach.
- Renegotiate all contracts on an annual basis. This includes contracts with vendors, landlords, logistics providers, and equipment leases. As you develop relationships with your vendors and providers, you want to negotiate more cost effective contracts and be reluctant to sign into contracts longer than one year. Actively cultivate relationships with additional vendors to be able to have leverage if a switch is needed.
- Talk to your customers frequenting. Your customers may have some really great ideas on products or services that aren’t needed, or ways to reduce or replace unnecessary steps in a process that you or your team might not have thought of previously. In addition, developing an open relationship with your customer can lead to ideas for products and services that might create additional revenues streams.
- Change up your payment terms to suit your product, service, or inventory. In other words, negotiate your contracts to include payment terms that match the inventory turns of individual products. So if you are purchasing an item from a supplier that normally sells in 60-90 days, negotiate Net90 instead of Net30. This will encourage your suppliers to work with you to improve your inventory productivity.
- Incorporate Just-In-Time inventory practices. Just-In-Time means that you take delivery of the item from the vendor so that it not “held” in your inventory for any length of time, but goes directly to the buyer or directly into the fabrication of the final product without being “stocked” in inventory. Just-In-Time practices can be implemented in many areas of the business to reduce “holding” costs for everything from purchased parts to employee efficiency.
- Maintain a steady headcount. While many companies, hire and layoff to ease the burden of difficult financial times, the costs of eliminating, hiring, and training employees far outweighs the costs of alternate solutions. Some ways to avoid this expensive cycle include allowing attrition without hiring replacements for open position and combining or re-organizing job responsibilities. Hiring contract employees or temporary employees is another solution that is easier now than in the past with the advent of more capable employment agencies. Additional tools that can increase the productivity and efficiency of existing employees are technology, lean techniques, and process re-engineering. The goal is to increase the revenue per employee by creating efficiency and effectiveness.
While streamlining processes, cutting costs, and increasing efficiencies will improve your bottom line in difficult times, it’s critical to also sustain a progressive, positive, and functional company culture. If the changes you implement turn your company’s culture into a “dog eat dog” fight for survival of the fittest, eventually you will be worse off than if you did nothing.
Mahalo and much success,
Crone, E. S. (2015, February 20). 7 Smart Ways for Your Small Business to Reduce Costs. Retrieved from nerdwallet: http://www.nerdwallet.com/blog/small-business/small-business-reduce-expenses-boost-cash-flow/
Jacquelyn Lynn, I. R. (2015). 50 Ways to Save Money in Your Business. Retrieved from Entrepreneur: http://www.entrepreneur.com/article/71318
Odland, S. (2012, February 15). 5 Ways to Control Costs. Retrieved from Forbes: http://www.forbes.com/sites/steveodland/2012/02/15/5-ways-to-control-costs/
Tozzi, J. (2008, October 24). Shifting into Cost-Cutting Mode. Retrieved from Bloomberg Business: http://www.bloomberg.com/bw/stories/2008-10-24/shifting-into-cost-cutting-modebusinessweek-business-news-stock-market-and-financial-advice