How to Cut Costs Strategically Without Stalling Your Business Growth
A proven formula for growing a privately held business is to increase revenue while keeping expenses constant. However, revenue growth can be a challenge in a competitive market or soft economy. Another option is to look for ways to selectively cut costs.
By implementing strategic cost-cutting initiatives in targeted areas, your business can maintain top-line results while also achieving operating margin improvement. This will make your income statement more attractive to bank lenders and potential investors or acquirers. It also can increase cash flow—a key to riding through rough patches in the economy.
Here are five areas to consider:
- Take advantage of pre-payment discounts. At least one big credit card issuer offers a discount of 1.5 percent for timely payments related to purchases of goods and services. Some of your vendors and suppliers may be willing to beat that. For example, a supplier whose normal terms are net 60 days may be willing to offer a 2 percent discount for payment within 10 days of invoice. By earning a 2 percent discount on a $10,000 invoice, you save $200. You also earn an annualized interest rate (on the prepaid amount) of about 15% on your cash.
- Review phone bills and options. Do you know how much your company pays for all telecommunication services, per employee per month? Start by setting a company-wide goal (e.g., $40 per employee per month) and a time frame (such as six months) to meet it. In the meantime, explore options for free or low-cost Internet phone service (VOIP), video-conferencing services, and virtual phone number services. A few companies offer small businesses unlimited long-distance phone and fax service for a flat monthly fee.
- Go paperless. Paper-based business systems have always been expensive when you add up the cost of paper, printing, filing space, mailing/delivery and recycling/disposal. Meanwhile, paperless technologies keep getting better and cheaper. High-powered scanners, high-capacity servers, and cloud-based Internet services are creating competitive advantages and cost savings for businesses of all sizes. Turnkey paperless vendors can help to convert everyday paper forms into all-electronic files, with secure storage and anytime, anywhere access. Since paperless initiatives enable employees to work from home, they also can help to reduce office space costs and promote business continuity planning.
- Share services. Small businesses usually lack the economies of scale enjoyed by big companies. Shared services help to overcome this competitive disadvantage by pooling the resources or purchasing power of several companies. For example, business incubators are designed to help small companies share space and services including a receptionist, office equipment, high-speed Internet access, high-capacity servers, telecommunications, loading docks and storage areas. Rather than hiring programmers to develop and update custom software, small businesses are participating in Application Service Provider (ASP) solutions that can be centrally maintained and updated, delivered over the Internet and linked into each user’s existing systems.
- Outsource key roles. Key executive roles, such as CFO or head of HR, can be outsourced to firms that offer qualified professional resources. These can bring diverse experience and new perspectives to your company. Outsourcing also can fill roles that are required to help companies achieve temporary or time-sensitive goals, such as an engineer to lead an expansion project or a financial specialist to drive an acquisition. Outsourcing can even help to define the optimum timing, job specifications and candidate requirements for full-time hires.
Although these five ideas are not a definitive list, they can help to expand your thinking about cost-saving possibilities. Think strategically to identify targeted cost-cutting initiatives that: 1) pose the least risk to continued revenue growth; 2) offer the highest probability of savings over both the short and long term; and 3) take advantage of new technologies, changes in the market, or emerging options such as paperless and outsourcing.
It’s a good idea to involve your executive team, and perhaps other employees, in the process of selecting targets and setting specific cost-saving goals. A smart policy is to offer individual or group incentives for the achievement of these goals. The idea is: “If you can help our company figure out a way to save $50 a month, we’ll give you $100.” Now, that’s good math!