While many businesses focus on revenue generation to increase profits, it’s not always that easy to achieve in today’s competitive marketplace. Yet, managing business costs can improve profit margins of your business
An increase in revenue often requires investment. Whether you encourage existing customers to increase their purchases or find new markets for your products, you might need to invest in marketing or perhaps expand your sales team to achieve the increase in sales. The increase in profit is only equal to the increased revenue after deducting the additional cost.
Most entrepreneurs believe in the adage, you need to spend money to make it. Yet, in worst case scenario, if you have spent more than you made – for example, through a not-so-effective marketing campaign – it’s likely that your profits will decrease.
Why Cost Efficiency Matters?
In order to generate the maximum return from the capital invested into the business, it is essential to cut down unnecessary costs. For every cost, the business must question what return it can expect to generate from the spending – will it generate additional revenue and contribute to profit or is it just an expense that adds no value?
For instance, the cost of research and development for a new product is likely to generate significant returns while a new luxury car for the CEO will probably not be as profitable.
Successful businesses spend money on those activities which can maximize their returns. Yet, they cannot compromise on the quality of the product/service they offer. Though some costs in a business are fixes, there are operational costs that can be managed efficiently. Such expenses can be controlled to bolster your company stocks.
Cutting Business Expenses to Increase Profits
Here are 5 ways a business can cut costs to increase its profits.
1. Find the best price for raw materials
Many businesses require purchasing large amount of raw materials in order to produce goods for their customers. The key for them is to find raw materials at the lowest possible price that can significantly increase profits.
This means that you need to constantly search around, asking different vendors for their prices. You can then negotiate with your vendor to match the lowest price or switch to a new one.
Most vendors will be willing to revise their prices in an attempt to build a long-term relationship, especially if you are a regular customer – giving them sufficient business and paying your bills on time. So, there’s no need to be afraid when asking for a discount.
Pro-tip: You can also improve your purchasing power by working in collaboration with other companies that require the same materials as you – purchase together and you may be able to secure lower prices due to a higher volume.
2. Utilize your office space in the most effective way
The rent of office premises is often a major expense for any business so it is essential to make the best use of your space. Analyze the space you have and consider what each area is designated for – e.g. meetings, storage, lunch etc. and take note of any unnecessary furniture or equipment you find.
Every office piles up clutter over time which needs to be gotten rid of so that some space is utilized for other business purposes. If you have sufficient unused space, consider moving to a smaller premises or renting it out to someone for an additional source of revenue.
Greater the premises, higher is the utility costs such as electricity. This can be controlled by adding cost-saving equipment to your business and purchasing as much machinery as necessary. The business can sell the obsolete machinery to earn salvage value.
Pro-tip: Alternatively, think about whether you really need an office. Home-based businesses are on the rise. They save money and a mobile workforce lets them operate just like a traditional business.
3. Change your marketing strategy
How can you generate profits if there is no one to buy your products or when nobody knows about them? Every business spends money on marketing as it is an essential yet unavoidable expenditure. But are you really marketing your products at the lowest cost possible?
With almost everyone having access to the Internet nowadays, there are so many ways to advertise your products at lesser cost by doing it online. Make use of social media platforms like Facebook and Twitter and work on building a group of followers online.
Having an email list of your potential market is also a cost-effective way to keep them informed about your latest offerings through email, at no cost. You can also set aside a budget for advertising expenses so that you may not surpass the revenue.
Pro-tip: Cross-promotion is another great marketing technique that costs nothing – collaborate with related businesses and market their services, in exchange for them marketing yours.
4. Reduce production costs
For a manufacturing business, production costs have a significant impact on profits so it is important to minimize them where possible. The first step should be to analyze your production process and optimize it to ensure that the product moves from one stage to the next as quickly as possible. There should be no interruptions and risk of damage. Wastage also needs to be minimized through staff training.
The production process is efficient if it responds to customer demand in a timely manner without the need for overproduction and holding excess inventory which might increases costs (storage costs plus risk of damage and obsolescence).
Pro-tip: For unanticipated large orders, short term business funding can be arranged so it can easily procure additional raw materials and fulfill orders when the need arises.
5. Cut down on employee costs
There are several ways to do this.
- Reduce working hours: Some employees prefer to work for lesser hours even if it means a reduction in their pay (e.g. senior workers)
- Motivation to increase productivity: Happy employees produce better results. Offer rewards for good performance, engage employees, and listen to what they have to say so that they are encouraged to do their best for the business.
- Offer commission with gross salary: This can be done for staff members with targeted work, for instance, sales team. This is beneficial as you only need to pay if there are results (i.e. if they generate sales)
- Train employees in new areas: skilled employees can be asked to perform multi-tasking reducing the need to have a large workforce consisting of ‘specialists’ only.
Pro-tip: To cut employee costs, the aim should be to limit the workforce to essential staff only and hire freelancers for short-term, specialized work. They can be done whenever the need arises, without any long-term commitment.
The Bottom Line
To sum up, saving money is easier than making it. By being mindful of what you are spending on and identifying opportunities to cut costs, you can significantly improve your profitability. In today’s unstable marketplace where a business’ position in the market is always changing, cost control is one of the most effective way to survive and stay above in the cut-throat competition.