Ways to effectively reduce your costs and improve your business's profit margin.

Without a doubt, one of the quickest and most effective ways to improve your business's bottom line is to eliminate unnecessary costs. Not only will it save you money in the short term, but it will improve the general health of your business so you can continue to perform during challenging times.

Here are our tips on the best ways for small businesses to manage their costs:

Review your P&L statements

At Trinity, we believe that you can’t manage what you don’t track, so the first step in controlling your costs is to conduct a deep dive into your financial data.

Look at your Profit & Loss statements to see what your largest expenses are and review from the top down whether there are any changes that can be made to reduce expenditure. Remember, most companies die from indigestion rather than starvation.

There may be certain costs that you can quickly eliminate by reviewing your operating expenses. For example;

• Review your marketing efforts and eliminate channels that are not working
• Use energy-saving technology such as lights that operate on movement and LED lightbulbs
• Remove under-utilised equipment such as phones, printers and computers that waste energy
• Go paperless to eliminate paper, print and file storage costs
• Eliminate unused software or shop around to get a better deal elsewhere
• Review software that charges per user, then remove redundant accounts

Benchmark everything!

The best way to determine if you are overspending in certain areas of your business is to benchmark against the industry averages. Compare your operational costs to your competition, including raw materials, staff wages, rent & utilities. If you are spending more than the average, then this is a good place to start.

A good accountant or business advisor can help you benchmark your costs again your industry standards.

Review your pricing

Ensuring that your pricing strategy is right is one of the most important things you can do for your profit margin.   If you’ve gone through the process of benchmarking your pricing model, you’ll know if your pricing is competitive in the market or if you are undervaluing your product or services.

You should start by closely examining all your costs to make sure they are correctly reflected in your pricing calculations, including;

• Overhead costs – Power, internet
• Direct costs – Supplier costs, cost of goods, staff wages
• Other costs – Fuel, car expenses, accounting fees

Remember, you’re in business to make money, not friends. If you decide to put your prices up, it’s best to be transparent with your customers about why you're doing so.  So long as you are being fair, most will understand and pay accordingly. If some are not willing to pay the extra price for your product or service, then they are probably not an ideal customer.

Review your contracts

Once you’ve taken the time to review your financials, one of the very next things you should do is review your supplier and vendor contacts. This is also an important step in managing your cash flow.

• Review business loans and insurance policies and see if you can obtain better rates
• If you rent, speak to your landlord about reduced rent for bulk payments upfront
• Negotiate extended contracts with suppliers on raw materials to obtain annual purchase price breaks. 
• Consolidating suppliers can allow you better leverage when negotiating prices
• Look at the terms of payment for your raw materials and see if you can reflect these terms in your finished goods so that you match your payment terms with the products you sell.

Review your processes

One of the biggest reasons for profit leakage is due to broken or inefficient processes. Therefore, reviewing your processes is one of the most important actions you can take, specifically;

• Redesign processes to eliminate duplication of effort and time
• Identify manual, paper-based systems that could be computerised
• Implement workflows for purchasing to avoid making frequent small orders
• Make use of checklists to reduce human error
• Make more use of technology and automation

Review your staffing

There are many ways that you can review your staffing costs without causing damage to your company culture, including;

• Reward & Recognise great staff – It may seem counter-productive in the process of cutting costs but given that it is an expensive exercise to hire new staff, it is worth investing in cultivating a strong team culture that rewards and recognises great staff and fosters loyalty. It also serves as a motivator for other staff to work hard and remain loyal when they can see the benefits of doing so.
• Review your hiring process – hiring the wrong people is very expensive. Not only is the process itself time-consuming, but it requires time and money to onboard and train a new staff member. It’s important to continuously improve your hiring process so that you have a better chance of finding and keeping the right staff.
• Consider outsourcing –Consider outsourcing repetitive or ad-hoc tasks to reduce additional staffing costs such as superannuation and annual leave entitlements.
• Offer part-time hours –If it is feasible to do so, offering part-time hours can increase staff efficiencies and save you money.

Remember, less people do not equal less output. A lot of businesses accept that working longer doesn’t necessarily mean working harder. Covid-19 has accelerated the necessity for flexibility, and this may actually help to improve productivity.

Review your product range

Review your current offerings and reduce, where possible, the number of products / services you deliver which can boost profit. To be able to do this, you need to review which of your offerings are:

• selling most
• costing you the least to produce/offer
• making you the most amount of money
• not selling well or at all
• under-priced

By going through the second step of benchmarking your prices, you can determine which products/services you can safely increase the prices for to further improve your profit margin.

Review your premises

If COVID has taught us anything it’s that most service businesses can run quite smoothly with a remote workforce. Consider your options when it comes to having a physical location for your business:

• Is your current premises too large? Could you move into a smaller space?
• Is it too small and holding you back from expanding your operations? 
• Can you rent out under-utilised office space to other businesses?
• Can you offer part-time staff a shared workspace?
• Can you create multi-functional spaces with removable partitions to accommodate infrequent gatherings or meetings?

Review your physical assets

Your physical assets are your tangible goods such as your premises (if you own one), vehicles, computers, office furniture and fixtures as well as any inventory you may carry.

To avoid the problem of unexpected costs, make sure you do an audit on all your assets and plan to repair or replace old and faulty equipment or work vehicles over a reasonable period.

If you sell a product, you’ll also need to ensure that you manage your inventory properly to avoid unnecessary storage costs. It’s a delicate balance between buying in bulk to keep costs down and buying ‘just-in-time’ to keep storage costs down.

Good quality accounting systems like Xero can help you to monitor your stock levels regularly so that you only purchase what you need for the foreseeable future.

Budget & Forecast

The best way to manage your costs going forward is to forecast your spending and create a budget, then record your actual spending to compare with your budget. 

If there is a discrepancy between your budget versus actual spending, then you’ll need to understand why and determine whether changes can be made to avoid it happening in the future. You’ll need to monitor your budgeted and forecasted figures regularly so you can adjust quickly if need be.

To do this successfully, we would recommend you start using a quality accounting system such as Xero to help create and regularly report on your budget.

If you’re a small business owner who needs help with your financial reports and reducing profit leakage, then get in contact today! 

Need support for your business?
Contact Trinity Advisory today.

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