If there is one phrase that sounds like an angel’s voice to a finance executive, it is cost reduction. Businesses large and small are always looking for ways to reduce costs and save money.
This can be done with large, full-scale changes to operational structures and processes, or it can be done with smaller, more manageable changes to the way you and your team operate on a day-to-day basis. Sometimes even unnoticeable changes can make a big difference to your company’s bottom line.
You can’t just start cutting corners and expenses will magically fall into place. You have to take a strategic and holistic approach, looking at all aspects of your business to find where improvements can be made.
Below, we’ll examine the benefits of operational cost reduction, how to complete a cost reduction analysis and ten of the most effective ways to save money on everyday business expenses.
Ready? Let’s jump right in!
Benefits of operational cost reduction
The benefits of operational cost reduction are many and varied, but can be summed up with three key points:
- Improved profits
- Increased competitiveness
- Greater resilience to external shocks
Operational cost reduction is not just about saving money for the sake of it. It’s about making your business more efficient, more agile, and better able to weather any storms that come your way. Let’s take a closer look at each of these benefits in turn.
This one is pretty self-explanatory. If you can reduce the costs of running your business, your profits will improve. This extra profit can be reinvested back into the business to help it grow, or distributed to shareholders as dividends.
In today’s global market, businesses are under constant pressure to keep costs down while still delivering a high-quality product or service. Operational cost reduction can give you the edge you need to stay ahead of the competition.
Greater resilience to external shocks
We all know that the world is an unpredictable place. No matter how well you plan, there are always going to be external factors beyond your control that can have an impact on your business. These could be anything from a natural disaster to a change in government regulation.
If your business is carrying too much fat, it will be less able to weather these shocks and could even be pushed into insolvency. By reducing your costs, you make your business leaner and more agile, giving it a better chance of survival in tough times.
How to complete a cost reduction analysis
You can’t just start dropping your wages, order fewer products, or avoid paying an invoice to save money. You’ll need a clear plan ahead of time, to make sure you are trimming fat — not muscle.
Follow these steps for an effective cost reduction analysis before you do anything else.
Define your objectives
The first step in any cost reduction exercise is to define your objectives. What are you trying to achieve? Do you want to reduce costs by a certain percentage? Are you looking to improve profits or increase competitiveness?
It is important to be clear about your goals from the outset, as this will help you measure the success of your cost reduction efforts later on.
Once you know what you want to achieve, you need to gather data on your current costs. This could include anything from staff salaries to the cost of raw materials.
If you don’t have this data readily available, now is the time to start tracking it. You can’t manage what you don’t measure!
Analyze your data
Once you have all the relevant data, it’s time to start analyzing it. Look for areas where costs are higher than they should be or where there is scope for improvement.
Don’t be afraid to get creative here. Sometimes the best cost savings come from thinking outside the box.
Develop a plan
Once you have identified areas for improvement, it’s time to develop a plan of action. This should include specific steps that you and your team need to take to reduce costs.
Make sure that your plan is realistic and achievable, and set a timeframe for each step.
Implement your plan
The final step is to implement your plan. This is where the rubber meets the road! Make sure that everyone in your team knows what they need to do and when they need to do it.
Review your progress
Last but not least, don’t forget to review your progress regularly. This will help you identify any areas where you are falling behind and make necessary adjustments to your plan.
Completing a cost reduction analysis is the first step on the road to saving money for your business. But what specific measures can you take to reduce costs?
10 ways to achieve business cost reduction
Need help figuring out where you can save money? Luckily, we have ten easy solutions to take a little bit off at every turn.
Review your business processes
The first step is to take a close look at your current business processes and identify areas where improvements can be made. Do you have any inefficient or outdated processes that are costing you time and money? Are there any tasks that could be automated or delegated to save you valuable resources?
Reduce energy consumption
One of the easiest ways to reduce costs is to simply use less energy. Start by doing an energy audit of your office space and equipment. Identify areas where you can reduce consumption and make changes accordingly.
This can be among the best cost reduction strategies in healthcare and other large technology-driven businesses, as well as data centers.
Cut back on office supplies
Another easy way to reduce business costs is to cut back on office supplies. Do you need that ream of paper or box of pens? Can you find a cheaper alternative to your current supplier? Sometimes, small changes like this can add up to big savings.
Review your office space
Do you need that big, fancy office space? In today’s connected marketplace, do you need an office at all? If you’re trying to reduce costs, it may be time to downsize. A smaller space (or no space at all) can mean big savings on rent and utilities.
Negotiate with suppliers
One of the best ways to save money on business costs is to negotiate with your suppliers. When was the last time you shopped around for a better deal on supplies or services?
Cost reduction strategies in the supply chain are one of the biggest opportunities to save money.
Reduce travel expenses
If your business requires a lot of travel, it’s important to find ways to reduce travel expenses. There are many ways to do this, from booking flights in advance to taking advantage of loyalty programs. By being strategic about your travel plans, you can save your business a lot of money.
Automate where possible
In today’s world, many tasks can be automated. From bookkeeping to customer service, there are many ways to use technology to save time and money. By automating repetitive tasks, you can free up your team to focus on more important things, and save money in the process.
Outsource where possible
Outsourcing is another great way to save money on business costs. If you can find a cheaper or more efficient way to do something, don’t be afraid to outsource it. Many businesses specialize in providing cost-effective solutions.
Review your insurance coverage
Insurance is a necessary expense for most businesses, but that doesn’t mean you have to overpay. Take the time to review your coverage and make sure you’re not paying for more than you need. You may be able to find a better deal by shopping around or switching providers.
Make tax-deductible purchases
Whenever possible, try to make tax-deductible purchases. This can help you save money on business taxes and make your business more efficient.
By following these tips, you can save your business a lot of money on everyday expenses. Remember, even small changes can add up to big savings. So don’t be afraid to get creative and think outside the box. With a little effort, you can find many ways to reduce your business costs.
Cost reduction examples
Before you go, let’s go through a hypothetical example that may give you a better understanding of the process.
Assembly line cost reduction
A clothing manufacturer wants to reduce the cost of producing a shirt. They first set up a cost analysis, and discover:
- The cost of the fabric is $5 per yard. They use two yards of fabric to make a shirt, so the total cost of the fabric is $10.
- The cost of labor is $15 per hour. It takes one hour to sew a shirt, so the total cost of labor is $15.
- The company has other miscellaneous costs totaling $5 per shirt.
With this information in hand, the company decides to try a few different cost-reduction strategies.
- They find a new supplier who can provide the fabric for $4.50 per yard. This saves them $1 per shirt on the cost of the fabric.
- They also invest in some new sewing machines that will allow their workers to sew shirts faster. Though the initial investment is hefty, it now only takes 30 minutes to sew a shirt. This saves the company $7.50 per shirt in labor costs.
- They also renegotiate their lease, which saves them $0.50 per shirt in overhead.If there is one phrase that sounds like an angel’s voice to a finance executive, it is cost reduction.
In total, these cost reduction strategies save the company $9 per shirt. If they produce 1,000 per month, that’s a savings of $9,000, or $108,000 per year! Not too shabby.
By following some of these tips, you too can turn your business into a lean, mean, cost-cutting machine!