by Michelle Wright, founder and CEO of Cause4
Successful small businesses succeed in a many different ways but failing businesses usually fail for the same reason – they run out of money.
The pressure is relentless for those who own or run a small business to keep the cash flowing in as they develop their products and services. The urgent hunt to generate leads for new business and to explore untapped markets can take up a large portion of available time and energy. However, are many companies giving as much attention to reducing their spending?
‘Reducing costs’ is an unsexy part of business management and probably goes along with tax returns for the least inspiring aspects of entrepreneurialism. And, for those you work with, the very idea of a cost reduction exercise can put the cat amongst the pigeons as it so often is a euphemism for impending redundancies or cuts to perks. But, in reality, efficient cost cutting won’t threaten the workforce, it will sustain it.
Few small businesses can afford to hire a full-time cost manager so it’s up to everyone to improve the way money is spent and saved. However, if you’re relying on a hard-working team in a small business most of them won’t have the time or motivation to add this activity to their busy working days. What can result from short-term thinking is a swift look through the supplier list and an online search for cheaper alternatives. Although there’s logic in that, it can cause more problems that it resolves if quality or reliability is affected.
Cause4 went through a cost review recently – it was eye-opening but not pain-free. The exercise took a year to complete as we reviewed everything from stationery and utilities to tax credits. We looked at how we used the resources we had including our rental space. What we discovered was a surprise. Our ‘bare bones’ stationery bill which we thought was impossible to reduce was cut by £1,000 a year. We discovered that our investment in digital systems meant that we were eligible for almost £30k of innovation tax credits. At the end of the process we were able to reduce costs against turnover by 7%. From now on we’ll be monitoring costs with the same passion as we target new business.
Here’s what we learned about making cost cutting effective without harming our business or the people within it:
- It’s a team activity – for some even the idea of a cost saving exercise is unnerving. Be clear from the start about your end goal – share ideas for what the money saved will be used for and involve everyone. Nothing should be off limits for consideration and more opinions bring more opportunities to save.
- Don’t skimp on quality – just because it’s cheap doesn’t mean it’s best. Don’t reduce the cost of your professional services, such as your auditors, accountants or lawyers. It might mean you are assigned an office junior rather than the senior partner who you need.
- Consider innovative partnerships and new ways of delivering activities – have you considered that you qualify for VAT relief by sharing back office services or through joint procurement? You might be able to save money if you have a shared process for database procurement for example. Embrace ‘sharism’.
- Draft up a contingency plan – do spend time ensuring you’re ready if the worst-case scenario happens. If your level of income is reduced would you still be able to sustain your organisation? If you had, say, 25% or even 40% less money coming in, what would you cut? It’s a great way to prioritise your expenditure.
- Don’t just target the ‘easy to cut’ – two of the easiest areas to cut are marketing and training but both would have an impact on lead generation and company morale. A strong, effective marketing plan can help generate inbound queries and new business opportunities. Don’t go silent just because you’re being cost-efficient. The same can be said for cutting planned staff development. Ensure your cost-cutting isn’t jeopardising the business.
For many of us, the pressure to make more money can be all we think about. However, with less costs you’ll get quicker to profitability. Think about cost reduction in the same imaginative way you think about new business. You’ll be pleasantly surprised at what you discover.