If you want to improve the profitability of your Small or Medium sized business and want to do it very quickly, a natural solution is to lower the operating costs. The obvious question is how to lower operating costs. We try to  answer this question in this post.

Cost reduction should be done strategically so that it  doesn’t impact the ability of your company to generate revenue.

When cost-cutting season knocks on your company’s door, the first two things that usually need to go are employees salary expenses and marketing. But if you look closer at your operating cost, you can see find other savings opportunities.

The fact is, most SMB owners don’t have a clear insight into their company’s day-to-day operations expenses. So, just run a detailed cost report by category and you will be surprised with what you discover. Here are a few places for you to look:

1. Checklist – how to lower operating costs

When you carefully list your operating costs, you will be able to see all the costs that your business is carrying.  A handful of operating costs would fall in the bucket of totally unnecessary. Those operating expenses quite often can fall below the SMB’s owner threshold of concern. Bring together all those small cash leaks and put them out of your misery once and forever.

Next step is to check your list one more time and search for controllable operating costs. You should start tracking those expenses. Remember – “what gets measured gets managed!” In other words, you can reduce your operating expenses by just tracking them. However, if you actively manage the cost, the controllable costs will seriously cut down.

Every good operations consultant knows how to cut, track and manage operating costs and to earn good fees with those three steps alone. If you learn how to do that, you can do your own operating costs management and save even more $$$ by not hiring a consultant.

2. Negotiate

Now when you know where your operating expenses are coming from, you should focus on two of them:

  • largest monthly expenditure
  • longest-standing relationship

If you manage to shave even 1% off of the largest monthly expenditure, it can do magic for your bottom line. If you leverage your longtime customer status with some other provider, it can lead you to size-able discounts.

So before you pick up the phone, you should do your research, look for promotional rates and check in with several competitors for quotes. Try to open up your negotiations saying “We’ve enjoyed being your customer, but our monthly bill is getting too high for our wallet. How can we cooperate to bring it down?” That way you can set a synergetic tone, and convince them to work with you and help you lower your operating expenses.

Now when you have these prosperous negotiations under your belt, try to make it the best method of reviewing other expenses and constantly repeat that process to uncover opportunities for future savings.

3. Hire freelancers to do the work which doesn’t core to the business

You probably know that your savings can go way beyond the simple fact that you don’t have to pay payroll taxes or give benefits to an independent contractor. Most SMB’s don’t have full time work for non-core assignments. Outsourcing these assignments (website maintenance, book keeping, etc.) gives you the opportunity to pay for the project and to get a specialist for that task. Hire freelancers are always a better option than having an internal “jack of all trades”, not only because the work will be handled with more quality of the work but also because of the overall savings.

4. Change spending behavior of your employees

Cash often also tends to leak from SMB’s operations cost in seemingly irrelevant ways, usually because of wasteful spending or hasty activities. The problem usually begins with behavior.

Typical things like misplaced pens, lost meeting notebooks, unnecessary postage, and excessive printing. Most of the business owners don’t question those as necessary office expenses. A simple solution that often can save serious cash can be a little planning ahead.

It can be good to have insight into your employee’s spending habits, so you should take the time to monitor company’s card spend on a monthly basis. Just use purchase card monitoring to see how much your staff is spending on things like fast food and drink ,where they were spending, and ensure they were staying within the P-Card limits. Armed with the knowledge of what employees are spending when traveling or out of the office can lead to the following positive actions:

-You could restrict particular online and offline stores MCC codes so the company purchase card can’t be used at those places.

-You could monitor the spending to determine if that kind of spending correlate with an increase in productivity.

As you can see, having access to this kind of card data can lead to serious changes in your company, usually for the better. You can find this type of data using operational expense audit solution technology and see every purchase your employees make. Bottom line, lots of data gives you more insight into the heart of your company’s spending.

5. Reducing infrastructure costs

You can do both reduce infrastructure costs and keep your employees occupied with the managing of daily operations. Sure, it’s a brilliant move but you’re probably not convinced that you can do it. Don’t worry. You can accomplish that, just follow tips that are written below.

Move your SMB to a smaller office space. You can replace old fashion offices with a shared workspace for client/customer where they can have meetings and your employees can collaborate. This way your staff will share workspace, desks, and means at the office.

Your can notably reduce rent and similar costs (insurance and utilities for example)  with a little creativity.

6. Telecommute

As I already said, infrastructure costs can be a drain on your funding. Depending on the industry of your SMB, you should allow your staff to telecommute. They can work from the home for a particular part of their working week. Working from home is usually a favorite perk among employees, as they can cut down on their own commute time and expenses. All of that can accomplish significantly improved employee satisfaction – creating a win-win situation for everyone.

With a quantity of connectivity available now, the difference between a staff member sitting in an office and sitting at home is almost indistinguishable.

The number of SMB’s that has teleworkers is growing because of many advantages that can be arise from employers and employees engagement in telework. Except improving employee morale and productivity gains, telecommute also can reduce infrastructure costs.

7. Cancel Unused Services

You are probably thinking that this is a no-brainer, but unused services can easily continue to withdraw from your bank accounts or billed from your credit cards if you forget that they are left on auto-pay. So, you should look at all company’s costs in last six months. In case you find out that haven’t used certain service in 90 days, make sure to cancel it.

Also, maybe it’s time to reassess the services you still use and to find cheaper alternatives or use the opportunity to renegotiate your existing contracts.

This approach is called “spend analysis”, Spend analysis is the process of collecting, cleansing, classifying and analyzing spending data with the purpose of cutting down procurement costs, improving efficiency, and monitoring accordance. You should be interested in learning about this new technology of collecting and managing spend data, along with the growing acceptance that in order to know how to operate your spend and understand it.  Those are some of the reason why this new method have raised interest in spend analysis from many SMB’s and large companies as well and is performed every quarter. You can find out more about spend analysis here.

8. Use an online bill and pay software program

Implementing an online bill and pay software program can eliminate paperwork and save about 50% of payments time and bill approval.

Paying your company’s bills (and any other bill for that meter) online is a great benefit that internet has to offer us. So, you should consider using an online bill pay service and set up a secure online account which allows you to pay all your bills from one place. This way you can save your time, plus  automated payments will help you avoid late payments. Many banks offer some kind of bill paying feature via their website.

Use an online bill pay service and you will probably never receive another paper bill again. This service can make payments to any individual or company in the U.S. If you want to be more secure and like to keep record, you can demand images of bills and payment information that are retained for seven years, on a CD with bill payment data for every year on it.

9. Inventory and the strategy to reduce the cost

Many SMB’s are looking for ways to reduce expenses and quite often ignore the effect that inventory sitting in the warehouse and the expense of keeping that inventory has on their finances. Usually, inventory expense can run serious percentage of a company’s fund but that depends on the industry.

Inventory carrying expense includes taxes, expense of capital (you need it for financing the inventory purchase), insurance, warehouse, labor and administrative staff for operating the warehouse, material handling, and equipment, utilities, etc. Inventory carrying expense can add up to 25% or more of the inventory rate on top of the inventory expense.

As Omar Khan (a senior consultant with Procurement Solutions Group) says “the larger the volume of “on hand inventory”, higher the carrying cost and total cash layout of the business. Hence the “single most effective approach” to reducing the operating costs of a small business is to reduce the on-hand inventory and associated carrying costs.”

So, if you want to significantly reduce your costs, you should focus on the inventory features that make a large percentage of the inventory rate or expense. These items usually are maintenance supplies, consumables, raw materials, etc. – depends on the type of the SMB we are talking about. Therewithal of the type of SMB however, the main goal is to cut down the quantity/volume of those large ticket pieces from the warehouse. You can do that by pushing those items back to their manufacturing facility or the suppliers’ warehouse and pick up only the quantity/volume that will be consumed, used in daily/weekly manufacturing at your business or sold.

If SMB is resource constrained, it makes perfect sense to keep outside consultant or expense reduction service provider which offers contingency based service. In the end, inventory expense reduction is unquestionably the best and most effective cost reduction strategy that will harvest most benefit with least effort, comparing to other expense areas.

10. Go Green

Consider making your SMB’s office space as green as you possibly can in order to reduce energy usage. You can do that by replacing regular light bulbs with compact fluorescent lighting. Also, you should find the way to reduce heating and cooling expenses by improving your windows and insulation, and consider cutting back on the volume of physical waste. It’s very important to encourage your employees to communicate via email, Skype or other electronic means – ask your vendors to do the same. Going green will drastically decrease the expense of company’s monthly office supply order.

Conclusion

Reducing operating expenses for your small to medium sized business can be hard but isn’t impossible.  Learning how to lower operating costs need discipline and employee buy in. It can take some time for you to get used to working within a lean budget, but you will be comfortable with that when you realize how important that step is for your business. Don’t get me wrong, you should never be afraid to spend money on employees and the services you really need, but take an extra time to consider the long-term expense of ongoing expensive technology or services.