In the economic environment that we are in now, just about every business needs to cut costs. The question is, where do you cut costs and have it not hurt your business?
When a company is having economic difficulties or wanting to increase their net income, an owner or senior management may decide that they need to cut costs by a certain percentage, for example, 10%. They then make an across the board 10% cut in everything. This is stupid. There are areas of a business that deserve additional investment because there is a good return on investment there. There are other areas of a business that aren’t needed and can be cut or downsized. In addition, there is waste in just about every business that should be found and eliminated.
Another common mistake is for senior management to have a gut feel as to where the waste in a business is or what product lines, services or departments should be cut. Gut feels are great, but they are often wrong and can only get you so far. Instead create a financial dashboard for your company. Your dashboard should show you your revenue, gross margin and gross profit by product line. It should also have key performance indicators that help you gauge the health of every individual business unit. Then, when it comes time to increase your net income or make hard cuts, you’ll have the facts right in front of you to make wise decisions.
So here is the right way to cut your costs and increase your profits:
1) Pull up your financial dashboard and see areas of your company that are growing, shrinking, creating profit or are an outperforming outlier or an underperforming outlier.
2) If something is overperforming, for example, creating excellent gross margins, mark it as a bright spot. See how you can duplicate that in other area in your company. This is probably the last place that you want to make cuts. Instead, if you can afford it, this is an area of your business that you should invest more money in. If a business unit is underperforming, find out why. If you don’t have a good plan to turn it around, then downsize this business unit or get rid of it all together.
3) Go through your accounts payable and look at all invoices. Talk to the appropriate people in your company and ask if they really need that product or service. If they don’t, get rid of it. If they do, require that they shop around for a competitive quote, then take that quote back to the vendor and show it to them to negotiate a better rate with it, or find another vendor.
In addition, by price shopping many of your services you will learn a lot about them. For example, when looking for credit card merchant services processing, by price shopping you will find out that you really should not be paying more than $10 to $20 per month in fees and your merchant processing rate should be no more than 1.6% for swipe transactions and 2.25% for non-swipe transactions. In addition, you should be getting free merchant services equipment instead of paying $250 to $1,000 per merchant equipment. On average, this type of savings could save a company processing $50,000 per month in credit card sales about $4,900 per year.
4) Also, pull up Google News and Google and do some searches to see what the typical costs are for everything your company buys. If you are overpaying, get a better deal. Lastly, look and see what the economic forcasts are for your industry or product and services lines of your company. If the forcasts look bad for certain parts of your business, you may very well be best served by cutting your investment in them thus maximizing your profit there, and moving your investment dollars to an area of your business that has more growth potential.
The key to successfully cutting budgets at your company without hurting it is to be strategic with your cuts. What is easiest is not usually what is best. Making your business better in the long run can require some pain now – but that’s OK. Just force yourself to maintain a positive attitude and a can-do spirit and you will get through the hard times and budget cuts, and you will find a way to prosperity.
